• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Tipalti
  • Solutions
    • Accounts Payable AutomationEnd-to-end, invoice-based payments designed for growing companies
      • Supplier Management IconSupplier Management
      • Invoice IconInvoice Management
      • PO Matching IconPurchase Order Matching
      • Global Payouts IconPayment Remittance
      • Payment RecPayment Reconciliation
    • Purchase Order ManagementControl and visibility over corporate spend
    • Global Partner PaymentsScalable payment solutions for creator, ad tech, sharing and marketplaces economy
      • Supplier Management IconPartner Management
      • Global Payouts IconGlobal Payments
      • Fraud Detection IconFraud Detection
      • Self Billing IconSelf-Billing Module
      • Tax Compliant IconTax and VAT Compliance
  • Technology
    • Overview
      • The Tipalti PlatformGlobal, scalable, and fully automated
    • Features
      • Multi Entity IconMulti-Entity Architecture
      • Financial Controls IconFinancial Controls
      • Payment API IconPayment API
      • Secure Cloud IconSecure Cloud
      • AI IconPi Payables Intelligence
    • Integrations
      • ERP & Accounting
      • NetSuite
      • Sage Intacct
      • QuickBooks
      • Microsoft Dynamics
      • Sage Accounting
      • Xero Accounting
      • Performance Marketing
      • Custom Integrations
  • Why Tipalti
    • Overview
      • Why TipaltiA modern, holistic, powerful payables solution that scales with your changing business needs
      • Customer StoriesSee how we transform finance operations
    • Benefits
      • Accolades
      • Invoice-Based Workflow
      • Performance-Based Workflow
      • Benefits by Role
    • Additional Services
      • Currency Management
      • FX Hedging
      • Implementation Services
      • Supplier Enablement Program
    • Industries
      • Business Services
      • Software and Technology
      • Ecommerce and Retail
      • Marketplaces and Gig Economy
      • Video and Digital Media
      • Video Gaming
      • Financial Services
      • Online Services
      • Education
      • Healthcare
      • Advertising Technology
      • Affiliate and Influencer Networks
      • Manufacturing and Wholesale
  • Resources
    • Blog
      • The Financial Advisor BlogStrategy and trends in payments
    • Guides
      • What is AP Automation?
      • What is Self-Billing?
      • Compare Payment Methods
      • Future of Finance
      • Destination IPO
      • Payments Across Borders
      • The Total Guide to ERP Integration
  • Company
    • About Us
      • About Tipalti
      • Careers
      • Partnerships
      • Contact Us
    • Help
      • Support
      • FAQs
    • News & Events
      • Events
      • Newsroom
  • Login
  • Book a Demo
Get Started

What Does 2/10 net 30 Mean & How to Calculate it


We've paired this article with a comprehensive guide to accounts payable. Get your copy of the Accounts Payable Survival Guide!
Get the FREE guide
Home / Early Payments Hub / 2/10 net 30

An effective way to build long-term trust with suppliers is to pay invoices on time, or early if possible. It’s a worthwhile investment that can benefit both you and your suppliers’ business goals and provide leverage for negotiating contracts. 

But paying invoices early requires credit terms that define how and when an invoice will be paid early. More often than not, suppliers offer early payment discounts. 

This is where the credit term of a 2/10 net 30 comes in.

What is 2/10 net 30?

2/10 net 30 is a trade credit extended to the buyer from the seller. A buyer will receive a 2% discount on the net amount if they pay the invoice in full within the first ten days of the invoice date. Otherwise, the full invoice amount is due in 30 days without a discount. These terms are specific to the 2/10 net 30 discount.

2/10 net 30 Explained

A purchase order and related invoice state the terms of a transaction. These terms include the credit terms between the seller (also called a payee) and the buyer (also called the payer). A typical net 30 credit term means the balance is due within 30 days from the invoice date.

A 2/10 net 30 (also known as 2 10 net 30) means the balance will be discounted by 2% if the buyer makes a payment within the first ten days. So the “2” represents the discount amount (2%) and the “10” represents the due date (10 days out).

How do you calculate 2/10 net 30? 

For example, if your business purchases $500 worth of goods or services on June 1st, it has entered a credit agreement with the seller. If your business pays the net amount between June 1st and 10th, you’ll receive a 2% discount, which will bring your total down to $490.  

Let’s walk through this 2/10 net 30 example step-by-step: 

— Invoice full amount: $500
— Invoice date: June 1
— Invoice due date: 30 days 
— Payment terms: 2/10 net 30
— Discount period: 10 days

Begin counting days from the invoice date.

A quick formula is 100% – discount % x invoice amount.
100% – 2% = 98% x $500 = $490.

Formula:
(Term Discount) x (Invoice Amount) = Reduced Payment 

Formula with Factors:
(0.02) x (500) = 490
This means your business would save $10 for a total payment of $490 if you paid between June 1st – 10th.

Date of invoice paymentNumber of days before payingEarly payment discount %Discount amountPayment amount due
June 1 through June 100 – 10
2%$10$490
June 11 through 
June 30
11 – 300%$0$500

Transform the way
your finance team works.

Bring scale and efficiency to your business with fully-automated, end-to-end payables.

Read more

What are buyer-initiated early payment programs?

A buyer-initiated early payment program is managed through accounts payable with either the dynamic discounting method or supply chain finance method. 

When the seller doesn’t offer cash discounts for prompt payment, buyers can negotiate for an early payment discount. If buyers propose a beneficial offer, sellers will accelerate their cash flow by accepting. And buyers would reduce spending. 

Dynamic Discounting Method 

Dynamic discounting describes when buyers initiate an early payment offer on an invoice-by-invoice basis with varying discounts. The buyer could offer a 2 percent discount to one seller and a 1.3 percent discount to another. Buyers adopting dynamic discounting can leverage their excess cash.

Supply Chain Method

With the supply chain finance method, the buyer borrows funds from a trade credit financer to pay the invoice under the early payment credit term, such as 2/10 net 30. The buyer will need to pay back the third-party bank or other financial institution since this method is essentially a loan. This corporate finance technique provides flexibility when cash balances are low.

What are some other trade terms like 2/10 net 30?

These payment terms on vendor and supplier invoices are defined in a similar way to 2/10 net 30:

2/10 net 45

2/10 net 45 means a 2% early payment discount if a customer pays within 10 days. Otherwise, the total amount is due within 45 days of the invoice date.

3/10 net 30

3/10 net 30 means a 3% discount if a customer pays within 10 days. Otherwise, the total amount is due within 30 days of the invoice date.

3/20 net 60

3/20 net 60 means 3% discount if a customer pays within 20 days of the invoice date. Otherwise, the net amount is due within 60 days of the invoice date. 

2/EOM net 45

2/EOM net 45 means a customer receives a 2% early payment discount if they pay by the end of the month (EOM). Otherwise, the net amount is due 45 days after the invoice date. 

Net 20 EOM

Net 20 EOM means the total amount is due for full payment within 20 days after the end of the month. 

On credit sales, vendors offer a 2 percent discount most often to customers. Some vendors charge interest or financing charges on overdue bills per invoice terms. 

When implementing an early payment program with either the 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 regarding 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 if 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.

Pros of 2/10 Net 30

The pros of 2/10 net 30 are that when the early payment discount is earned, the buyer pays 2% less for its purchases of goods and services, reducing the cost of goods sold, other expenses, and cash used. And the seller speeds up accounts receivable collections of credit sales, improving cash flow.

Your company’s financial statements, including the balance sheet, income statement, and statement of cash flows, will improve when your company takes early payment discounts. Supplier relationships will improve, and you can expect continued shipments of products. Paying bills early or on time contributes to a healthy credit score.

The CFO and the finance term contribute to business results when they optimize taking 2/10 net 30 and other attractive discount terms. 

The seller may reduce bad debts when it increases early collections. Sellers offering 2/10 net 30 discount terms attract more new customers who consider the early payment discount term to reduce their total product or service price. 

Cons of 2/10 Net 30 

Cons of 2/10 net 30 are that sellers receive 2% less cash from credit sales carried as accounts receivable when the credit term of 2/10 net 30 is offered to its customers and they pay within the early payment discount period. 

Although accounting software calculates early payment discounts for invoices, sellers may need to do a little more bookkeeping to record customer discounts when actually taken. 

Should a Company Take Advantage of 2/10 Net 30? 

A company should take advantage of 2/10 net 30 early payment discounts if they have sufficient cash flow or access to financing like a short-term line of credit or supply chain method financing from providers. The buyer should compare any interest rate to the opportunity cost of not taking the discount. 

Paying invoices promptly to apply discount terms reduces cash needed and improves profitability shown on the income statement.

What is 2/10 Net 30 Annualized Interest Rate?

The 2/10 net 30 annualized interest rate is calculated as 36.7%. 

Compare this 2/10 net 30 annualized interest rate to your bank’s annual interest rate for financing, which is generally much less. 

As an example, if the invoice amount is $500, calculate the 2/10 net 30 annualized interest rate:

$500 x (100% – 2%) = $500 x 98% = $490

($500/$490) – 1 = 2.04% for the 20 days between day 10 and day 30

Annualize 2.04% for one year:

360 days ➗ 20 days = 18 times per year

2.04% x 18 = 36.7% annualized

The calculation works the same and provides the same result for any vendor invoice amount. 

Your business can justify taking the 2/10 net 30 early payment discount if you have adequate cash or can tap into financing at a lower rate to provide the required money for prompt vendor invoice payment. 

A second decision is to compare the 2/10 net 30 annualized interest rate to your company’s WACC (weighted average cost of capital) rate or actual anticipated project returns. You can determine if you should invest in other company projects with higher rates of return instead. (The WACC often defines the hurdle rate of minimum percentage returns required on company projects.)

Although they’re not consistently enforced, some vendors have terms that impose an interest-based fine on late payments by customers. Avoid late fees. 

When to use the 2/10 Net 30 early payment discount

Taking a 2% early payment discount offered by the seller by paying vendor invoices for goods or services purchased on credit within 10 days of the invoice date makes sense when a company has enough internally-generated cash flow or access to financing. 

Small businesses and larger companies have access to bank lines of credit and supply chain financing. Startups and growing businesses have cash resources provided by venture capital. 

Primary Sidebar

RECENT POSTS

Vendor fraud schemes are one of the major challenges businesses face today. Fraud and billing schemes have ruined the financial fortunes of many, and have threatened the survival of some.
To effectively combat vendor fraud, organizations need to know how to identify them, practice due diligence, and establish effective internal controls.

Closing the books each month can be a tedious process, but it is vital to ensuring the financial health of your company. The month-end close can help you identify deviations from your financial plan early, so you can respond quickly. Conversely, it can uncover new opportunities for business growth, and drive strategies so you can exploit them.

Net 45 is an important credit term because it allows customers to pay 15 days later than the more common payment terms of net 30. Net 45 could give well-financed businesses a competitive advantage if they’re willing to take the risk and tie up their cash in accounts receivable longer or offer an early payment discount combined with the net 45 credit terms.

Footer

Solutions

  • Accounts Payable Automation
  • Global Partner Payments
  • PO Management

Capabilities

  • Overview
  • Supplier Management
  • Invoice Management
  • PO Matching
  • Self-Billing Module
  • Payment Reconciliation
  • Global Payments
  • Fraud Detection
  • Tax and VAT Compliance

Why Tipalti

  • Why Tipalti
  • Customer Stories
  • Invoice-Based Workflow
  • Performance-Based Workflow
  • Benefits by Role
  • Benefits by Industry

Technology

  • The Tipalti Platform
  • Multi-Entity Architecture
  • Financial Controls
  • Payment API
  • Secure Cloud
  • Pi Payables Intelligence

Resources

  • The Financial Advisor Blog
  • What is AP Automation?
  • Compare Payment Methods
  • Future of Finance
  • Destination IPO
  • Payments Across Borders
  • The Total Guide to ERP Integration

Company

  • About Tipalti
  • Careers
  • Partnerships
  • Events
  • Press
  • In The News
  • Media Kit
  • Support
  • FAQs

REGION

  • United Kingdom
    • North America
CONTACT US
LinkedIn Instagram Facebook Twitter YouTube
Tipalti Europe Ltd, Elm Barn Stert Road, Kingston Blount, Chinnor, OX39 4SB, Oxfordshire, United Kingdom. Registered in England & Wales, No.:12471817. Tipalti Europe Ltd is authorised by the Financial Conduct Authority as an Electronic Money Institution under the Electronic Money Regulations 2011. Our FRN (Firm Reference number) is 942778.
We Handled It.
Privacy Policy
|
Customer Assistance Policy
© 2010–2022 Tipalti Inc.