Terms like 2/10 net 30 look small but are expensive credit. Skipping a 2% discount to pay 20 days later costs an annualized 37%.
2/10 net 30 annualizes to 37.2%, and saves $200 on a $10,000 invoice.
The example
Three terms. Longer credit windows lower the annualized rate.
| A | B | C | D | E | F | G | |
|---|---|---|---|---|---|---|---|
| 1 | Case | Discount | Disc days | Net days | Invoice | Annualized | Saved |
| 2 | 2/10 net 30 | 2.0% | 10 | 30 | $10,000 | 37.2% | $200.00 |
| 3 | 1/10 net 30 | 1.0% | 10 | 30 | $5,000 | 18.4% | $50.00 |
| 4 | 3/15 net 45 | 3.0% | 15 | 45 | $8,000 | 37.6% | $240.00 |
The formula
Discount rate times periods per year:
How it works
Here is the logic, one piece at a time:
B2/(1-B2)is the cost per period.D2-C2is days of extra credit.365/...is periods per year.- The second formula is invoice times discount.
If your borrowing rate is lower than this, take the discount.
Try it: interactive demo
Enter discount, days and invoice.
Variations
360-day year
Use 360.
Compare
Compare to a loan rate.
Pitfalls & errors
Dates run from invoice date, not receipt.
Enter the discount as a decimal or percent-formatted.
Compare to your line of credit rate.
Practice workbook
Frequently asked questions
Why divide by 1-d?
Is this APR?
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