In business-to-business (B2B) transactions, payment is rarely expected at the exact moment of delivery. Instead, businesses extend trade credit using standard invoice terms like 'Net 30'. This simply means the buyer has 30 days from the invoice date to pay the full amount.
Terms like Net 15, Net 30, Net 60, and Net 90 are common. A longer term benefits the buyer's cash flow, as they can potentially sell the goods before paying for them. However, it strains the seller's cash flow, acting effectively as a short-term, zero-interest loan to the buyer.
Understanding 2/10 Net 30
To incentivize faster payment, sellers often offer early payment discounts, formatted as 'Discount/Days Net TotalDays'. The most common is '2/10 Net 30', which means the buyer can deduct 2% from the total invoice if they pay within 10 days; otherwise, the full net amount is due in 30 days.
For a $10,000 invoice with 2/10 Net 30 terms, paying on day 9 means you remit $9,800. If you wait until day 30, you pay the full $10,000. The $200 discount serves as an effective yield for paying 20 days early.
The hidden annualized cost of not taking the discount
Many businesses skip the 2% discount because it seems small, but the annualized interest rate of passing it up is massive. The formula is: (Discount % / (1 - Discount %)) × (365 / (Full Allowed Days - Discount Days)).
For 2/10 Net 30, the calculation is: (0.02 / 0.98) × (365 / 20) = 0.0204 × 18.25 = 37.2%. By waiting the extra 20 days to pay, the buyer is effectively borrowing that money at a 37.2% annual interest rate. It is almost always financially optimal to take the 2/10 Net 30 discount if cash is available.