Reading the terms
"2/10 net 30" means a 2% discount if paid within 10 days, otherwise the full amount is due in 30 days. In effect, the buyer earns 2% for paying 20 days sooner, and that period could repeat more than 18 times in a year. That is why the annual rate is so much larger than 2%.
The simple rate is the conventional way of quoting this. The compounded rate assumes the money is reinvested each cycle at the same return. The true economic picture usually lies between them, and most comparisons use the simple rate.
The formulas
Simple annualized rate
Rate % = Discount ÷ (1 − Discount) × 365 ÷ (Net days − Discount days) × 100
Compounded annualized rate
Rate % = ((1 + Discount ÷ (1 − Discount)) ^ (365 ÷ Days early) − 1) × 100
In both formulas, the discount is written as a decimal, so 2% is 0.02. Dividing by (1 − Discount) reflects that the buyer pays only the discounted amount.
Worked example
A supplier offers 2/10 net 30 on a $10,000 invoice.
- Discount: 2% = $200.00, so the buyer pays $9,800.00.
- Days paid early: 30 − 10 = 20 days.
- Simple annualized rate: 0.02 ÷ 0.98 × 365 ÷ 20 = 37.24%.
- Compounded annualized rate: 44.59%.
Should you offer or take the discount?
As a seller, compare the annualized rate with what other forms of short-term cash would cost you. If borrowing is much cheaper, a discount may be an expensive way to get paid sooner, unless late payment or collection problems are costing you more than the math shows.
As a buyer, take the discount if you have the cash available and it earns more than the money would earn elsewhere. Borrowing to take the discount can still make sense when your loan rate is well below the annualized rate. The loan payment calculator can help you find the cost of borrowing.
Frequently asked questions
Is 2/10 net 30 a good deal?
For a buyer with cash available, it is usually attractive, since few short-term investments pay near that annualized rate. For a seller, it is costly money, though it may be worthwhile if cash is tight or customers often pay late.
What if a customer takes the discount but pays late?
Your terms should state that the discount only applies if payment arrives within the discount window. Decide in advance how you will handle it, and bill the shortfall if you need to.
Why does the annual rate use 365 days?
That is the usual convention for this calculation. Some references use 360 days, which yields a slightly lower number. The difference rarely changes a decision.
Could a late fee work better than an early discount?
They do different jobs: a discount rewards fast payers and a late fee discourages slow ones. Many businesses use only one. See the invoice late fee calculator to compare the numbers.