What does 2/10 net 30 mean? Here’s how to make early payments a reality
Even though an invoice states balance owed, more often than not, it’s possible to negotiate paying less—well, only if you have an efficient accounts payable process that can process early payments.
An invoice states the terms of a transaction, such as the credit terms, between the seller (also called a payee) and the buyer (also called the payer). A typical credit term is net 30, which means the balance is due within 30 days from the invoice date.
However, sellers also offer the credit term of 2/10 net 30, which means the buyer will receive a 2 percent discount on the balance owed if payment is made within ten days; otherwise, the full invoice balance is due in 30 days. Along the same lines, other variations of the 2/10 net 30 payment method include terms like 2/10 net 40 or 2/10 net 60. Again, the buyer can receive a 2 percent discount on the balance if the payment is received within ten days; otherwise, net 40 and net 60 mean full payment is due within 40 days or 60 days, respectively.
Keep in mind, even when the seller doesn’t reduce the balance in exchange for immediate payment, buyers can still negotiate for an early payment discount by proposing an offer that’s mutually beneficial: sellers get to accelerate their cash flow, and buyers save big by reducing their spending, thus creating a more cash solvent supply chain.
A buyer-initiated early payment program is managed by accounts payable through either the dynamic discounting method or a supply chain finance method:
Dynamic discounting describes when the buyers/payers initiate an early payment offer on an invoice-by-invoice basis with varying discount amounts. In other words, the buyer could offer a 2 percent discount to one seller and a 1.3 percent discount to another buyer. Buyers who adopt dynamic discounting can do so because they are leveraging their excess cash.
With the supply chain finance method, the buyer borrows funds from a third party, like a bank or another financial institution, to pay the invoice under the early payment credit term, such as 2/10 net 30. The buyer will still need to pay back the third party since this method is essentially a loan, but this technique provides flexibility even with a low or unavailable balance sheet cash balance.
When it comes to implementing an early payment program with either dynamic discounting or supply chain finance method, companies will find it’s easier said than done. The rub lies in the efficiency of the accounts payable workflow. Businesses that have manual accounts payable processes will face these common challenges in regards to early payment discount:
- Lengthy invoice approval process: the time between receiving the invoice to approving the invoice is often outside the timeframe of the of 2/10 net 30, which prevents the buyer from taking advantage of the discount.
- Lack of data: buyers must negotiate an offer that’s attractive to the seller and makes a difference in the company profit margin. In other words, the discount needs to be mutually beneficial. Finding that sweet spot takes visibility into several variables: buyer hurdle rate, discounting liquidity constraints, availability of third-party financing, and more. Manual accounts payable processes make it hard for companies to have deep visibility into these variables across all vendors.
- Weak buyer-seller relationship: implementing an early payment program takes adoption from both the buyer and the seller. Building the relationship between accounts payable and the seller can be challenging when the only contact occurs during the onboarding process when sellers submit tax documents. The lack of real-time visibility into the status of a payment hinders the buyer’s ability to give an accurate timeframe for payment delivery, which can affect the seller’s attitude and trust toward joining an early payment discount program.
Buyers can take advantage of invoice discount through credit term 2/10 net 30 if they have an efficient accounts payable workflow. An automated accounts payable workflow automatically handles time-consuming tasks, such as verifying tax identification and contacting suppliers for missing tax information, and enables buyers to analyze and negotiate discounts for early payments with sellers. Simply put, automation is the key to unlocking the secret behind saving while spending.