What is an early payment discount?

An early payment discount is a reduction in the invoice total that a seller offers if the customer pays within a set number of days. The most familiar form is 2/10 net 30, which gives 2 percent off for payment within 10 days.

How it works

Terms are written as discount percent, discount days and full-payment days. In “2/10 net 30”:

• 2 is the percent discount.
• 10 is the number of days the discount is available.
• Net 30 means the full amount is due in 30 days if the discount is not taken.

The seller gives up a little money to get the rest sooner. The buyer saves money by paying earlier. For the buyer, this affects accounts payable, because paying earlier means cash leaves sooner.

The discount can be expensive for the seller when you look at it as an annual rate. With 2/10 net 30, the customer gets 2 percent for paying 20 days sooner. Over a year, that is about 18 such periods (365 divided by 20), so the effective annual cost is roughly 2/98 x 18, or about 37 percent. That is often higher than the cost of a short-term loan, so it is worth checking before you offer it.

Alternatives include shorter terms such as due on receipt, or keeping standard terms like net 30 and following up on time.

Example

A supplier invoices a customer $5,000.00 with terms 2/10 net 30 on May 1.

Work out the dates with the due date calculator.

How to write it on an invoice

1. State the terms plainly: “2% discount if paid within 10 days, otherwise net 30.”
2. Show the discounted total and the discount deadline date.
3. Say whether the discount applies to tax and shipping.
4. Be consistent. If you accept late discounted payments once, customers will expect it again.

Build an invoice that shows the terms with the free invoice generator.

Related terms

• Net 30: full payment due in 30 days.
• Due on receipt: payment expected right away.
• Accounts payable: what the buyer owes.
• Net 60: a longer term sometimes used with large buyers.