What does 2/10 net 30 mean?
The terms 2/10 net 30 mean the customer can take a 2% discount by paying within 10 days. Otherwise the full amount is due in 30 days. The customer is effectively being paid 2% to hand over their cash 20 days early.
Annual rate = Discount ÷ (1 − Discount) × 365 ÷ (Net days − Discount days)
Effective rate = (1 + Discount ÷ (1 − Discount))365 ÷ (Net − Discount days) − 1
Effective rate = (1 + Discount ÷ (1 − Discount))365 ÷ (Net − Discount days) − 1
Example
On a $10,000 invoice, 2/10 net 30 saves the customer $200. Getting a 2% return for 20 days works out to 37.24% a year, or 44.6% with compounding.
Should you offer or take it?
- As a buyer, taking the discount is almost always worth it if you have the cash, or can borrow it below the annual rate shown.
- As a seller, offering the discount is an expensive way to borrow. It can still make sense if cash flow is tight or late payments are a big problem. Compare it with the cost of a line of credit or invoice factoring.
- Pair the discount with clear late fees. See the invoice late fee calculator.
Frequently asked questions
What does 1/10 net 30 cost?
About 18.4% a year on a simple basis: 1% ÷ 99% × 365 ÷ 20.
Is it legal to charge customers who take the discount late?
You can decline a discount taken after the discount period and bill the difference. State it clearly on your invoices.
Why use 365 days?
It converts the short discount window into an annual rate so it can be compared with loan interest. Some textbooks use 360 days, which gives a slightly lower figure.
Results are estimates for planning and are not financial, tax or legal advice. See our methodology.