By Safock Procurement Research Team9 min read
Take a business that buys $11.9 million a year from suppliers, $5.9 million of it on early-payment discount terms. After allowing for the cost of paying early, those discounts are worth $68,113 a year. With approvals that take nine days on average and a weekly payment run, it collects $13,705. Only one invoice in six is paid inside the 10-day window.
The money is lost in the days each invoice spends waiting for approval and then for a payment run.
Early-payment discount terms are written as discount / discount period, net due date. 2/10 net 30 (also written 2/10 n30) means the supplier takes 2% off the invoice if it is paid within 10 days of the invoice date. Otherwise the full amount is due in 30 days.
Other common forms work the same way: 1/10 net 30 is 1% off within 10 days, and 1.5/15 net 45 is 1.5% off within 15 days, otherwise due in 45. Terms with no discount, such as plain Net 30, have nothing to capture.
Paying on day 10 instead of day 30 means giving the supplier your cash 20 days early. The discount is the return on those 20 days. To compare it with other uses of cash, convert it to an annual rate:
Annual rate = discount ÷ (100% − discount) × 365 ÷ (days paid early)
For 2/10 net 30: 2 ÷ 98 × 365 ÷ 20 = 37.2%. If you could repeat the trade all year and reinvest, the compounded rate is 44.6%.
| Terms | Paid early by | Annual rate | Compounded |
|---|---|---|---|
| 2/10 net 30 | 20 days | 37.2% | 44.6% |
| 1.5/15 net 45 | 30 days | 18.5% | 20.2% |
| 1/10 net 30 | 20 days | 18.4% | 20.1% |
| 2/10 net 60 | 50 days | 14.9% | 15.9% |
| 0.5/10 net 30 | 20 days | 9.2% | 9.6% |
| 1/10 net 60 | 50 days | 7.4% | 7.6% |
The discount percentage alone is misleading. 2/10 net 60 offers the same 2% as 2/10 net 30, but you pay 50 days early instead of 20, so it is worth well under half as much.
Take a discount when its annual rate is higher than your cost of capital: what you pay to borrow, or what the cash would earn elsewhere. The US Treasury's guidance to federal agencies puts it the same way: "If the effective annual discount rate is larger than the current value of funds rate, accept the discount and pay early" (Bureau of the Fiscal Service).
At an 8% cost of capital, every term in the table above is worth taking except 1/10 net 60. At 20%, only 2/10 net 30 still clears the bar. Our calculator applies the test to the simple annual rate, which is the stricter of the two: if the simple rate beats your cost of capital, the compounded rate does too.
The money you actually keep is the discount minus the cost of paying early. On a $100,000 invoice under 2/10 net 30, the discount is $2,000. Paying 20 days early at 8% costs $429.59 in interest you would otherwise have earned or avoided. You keep $1,570.41. The figures below are all net of that cost.
An invoice is paid when three waits have passed:
Two plus nine plus three and a half puts the average invoice at day 14.5. Payment times spread around that average, so some invoices make day 10, but only 16% of them. By day 15, 54% have been paid. By day 20, 89%. Nearly three-quarters of discount invoices are paid in the ten days after the window closes.
The business buys from suppliers on four kinds of terms. The figures assume an 8% cost of capital, two days to reach accounts payable, approvals of nine days on average and a weekly payment run, compared with approvals cut to two days.
| Terms | Annual spend | Worth a year | Paid in time today | Collected today | Collected with 2-day approvals |
|---|---|---|---|---|---|
| 2/10 net 30 | $3,200,000 | $50,253 | 16% | $7,923 | $43,532 |
| 1/10 net 30 | $1,800,000 | $10,188 | 16% | $1,606 | $8,826 |
| 1.5/15 net 45 | $900,000 | $7,671 | 54% | $4,176 | $7,668 |
| Net 30 | $6,000,000 | none | |||
| Total | $11,900,000 | $68,113 | 22% | $13,705 | $60,025 |
The 15-day terms fare much better than the 10-day ones under the same process, because day 15 sits just past the average payment date and day 10 sits well before it. The discount period matters as much as the discount.
Keep the weekly payment run and change only the average approval time, holding the spread at about two days either way:
| Average approval time | Average days to payment | Paid by day 10 | Collected a year |
|---|---|---|---|
| 1 day | 6.5 | 91% | $61,504 |
| 2 days | 7.5 | 84% | $56,620 |
| 3 days | 8.5 | 75% | $49,962 |
| 5 days | 10.5 | 51% | $33,238 |
| 7 days | 12.5 | 28% | $17,677 |
| 9 days | 14.5 | 14% | $7,800 |
| 12 days | 17.5 | 3% | $1,707 |
Each day of approval time between three and seven days is worth roughly $8,000 a year in this example. Below three days, the payment run becomes the limit.
Keep approvals at nine days on average and change only how often payments go out:
| Payment runs | Average days to payment | Paid in time | Collected a year |
|---|---|---|---|
| Every two weeks | 18.0 | 11% | $7,112 |
| Weekly | 14.5 | 22% | $13,705 |
| Twice a week | 12.8 | 32% | $20,688 |
| Daily | 11.0 | 47% | $30,709 |
Daily runs more than double what is collected, without anyone approving faster. Combine two-day approvals with payment runs twice a week and the example collects $68,028 of the $68,113 available.
Pick your terms, your annual spend on them, your average approval time and how often you pay suppliers. The defaults reproduce the 2/10 net 30 row above.
Quick estimate · same maths as the full calculator
Assumes 2 days for an invoice to reach AP and an 8% cost of capital. Change both, and add your other terms, in the full calculator.
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Early Payment Discount ROI Calculator
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Slow approvals often start further back. If invoices wait because nobody recorded what arrived, the receiving note is the place to fix it. If they wait because nobody is sure who should approve, an approval matrix settles it.
If the business is short of cash and would have to borrow at more than the discount rate, pay on the due date. The same applies to terms whose annual rate is below your cost of capital. And if the window has already closed, pay the full amount or agree an extension with the supplier first: taking a discount you didn't earn is a common source of short-payment disputes.
The supplier takes 2% off the invoice if you pay within 10 days of the invoice date. Otherwise the full amount is due within 30 days.
Divide the discount by what you pay after it, then multiply by 365 divided by the number of days you pay early. For 2/10 net 30: 2 ÷ 98 × 365 ÷ 20 = 37.2% a year. Compounded, it is 44.6%.
Almost always. At 37.2% a year it beats the cost of borrowing or the return on cash for most businesses. Take any discount whose annual rate is above your cost of capital, and pay on the due date when it isn’t.
Mostly because invoices take longer to reach a payment run than the discount window allows: a few days to reach accounts payable, a week or more waiting for approval, then up to a week for the next payment run. If the average invoice is paid on day 14, few are paid by day 10.
Only if the supplier agrees. Deducting a discount you didn’t earn is a common cause of short-payment disputes, and many suppliers will bill the difference back. Ask for an extension before the window closes instead.