Annualized Rate vs Discount % (at 10 days early, Net 30)
💡 Early payment discounts are a form of short-term financing. The annualized rate almost always exceeds typical bank borrowing rates. For buyers: compare annualized rate against your overdraft/CC rate. For sellers: offering 2%/10 Net 30 costs ~37% p.a. as a financing cost — consider if cheaper financing exists via invoice discounting/factoring.
About This Invoice Discount Calculator
An early payment discount (prompt payment discount) is a common B2B trade finance tool. This calculator uses the standard annualized rate formula: Rate = (discount% / (1 - discount%)) × (365 / days_early). For example, a 2% discount to pay 20 days early equals 37.24% annualized — far above typical bank rates. A buyer with a 12% borrowing cost should always pay early when the annualized discount exceeds 12%. The seller, in turn, effectively pays ~37% p.a. for the cash flow acceleration. This calculator shows both perspectives — the buyer's financial gain and the seller's implied financing cost — helping both parties make informed decisions about payment terms. Enter your invoice amount, discount rate, early payment window and normal credit period to see the full picture.
Frequently Asked Questions
What is an early payment discount? +
An early payment discount (cash discount) is an incentive offered by sellers for buyers who pay before the regular credit period ends. E.g., "2/10 Net 30" = 2% discount for paying in 10 days instead of 30. The annualized cost is typically 36%+ p.a., making it attractive for buyers with cheaper financing.
How is annualized rate calculated? +
Formula: Annualized rate = (d / (1-d)) × (365 / days_early) where d = discount fraction, days_early = credit period minus early payment days. Example: 2% discount, 20 days early: (0.02/0.98) × (365/20) = 0.0204 × 18.25 = 37.24% p.a.
When should a buyer accept the discount? +
Accept when the annualized discount rate exceeds your cost of capital or borrowing rate. If you can borrow at 12% p.a. but the discount annualizes to 37%, it is profitable to borrow and pay early — net benefit of 25% p.a. on the discounted amount.
What is '2/10 Net 30' payment term? +
"2/10 Net 30" means 2% discount if paid within 10 days; full amount due in 30 days. Annualized cost of forgoing: ~36.7% p.a. This makes it financially attractive for any buyer whose borrowing cost is below 36.7%. Most businesses should capture such discounts by drawing on credit lines.