Early Payment Discounts – A win-win situation for both buyers and sellers.
Businesses can get paid faster while customers can enjoy the savings. It’s certainly a good tactic to improve cash flow and customer relationships.
Though businesses have a wide array of ways to offer discounts and gain that competitive edge, 2/10 net 30 is one of the most common credit terms provided by businesses. Let’s dig more details about this early payment discount.
First, understand 2/10 net 30 meaning.
What does 2/10 net 30 mean?
A trade credit term that provides 2% discount, if the payment is done within 10 days
2/10 net 30 is an invoice term offered by the business to a customer. It means the buyer or the customer will receive a 2% discount on the total invoice amount if the payment is made within 10 days. If the customer does not make the payment within the first 10 days then the full amount (net) is due in 30 days without any discount.
2/10 net 30 calculation
Now that you’ve understood what is 2/10 net 30, we’ll crack the formula to calculate this term credit. The formula is quick and simple. The discount is generated by calculating the total amount of receivables and calculating the amount of discount.
Discount = Total Amount of Receivables x Percentage of Discount
So, the final formula goes like
2/10 Net 30 = Total Receivables – Total Discount
Another quick formula is
100% – Discount % x Invoice Amount
If this seems confusing, let’s take an example.
Example of 2/10 net 30 payment term
As a business owner if you opt to offer payment terms 2/10 net 30 to your customer then here is how it will be calculated.
For example –
Invoice full amount: $100,000
Invoice date: March 1
Invoice due date: 30 days
Payment terms: 2/10 net 30
Discount period: 10 days
So if the customer pays the amount within 10 days that is from March 1 through March 11 then an early payment discount of 2% will be applied.
As per the formula 1
Discount = 100000 x 2% = 2000
As per the 2/10 net 30 if the payment is done within 10 days
The discount will be applied which means $2000 will be deducted from the total amount receivable $100,000
2/10 Net 30 = $100,000 – $2000 = $98,000
Similarly, as per formula 2
100% – 2% which is 98% x $100,000
That makes the final amount $98,000
However, if the customer makes the payment from March 12 to March 30
(after the first 10 days) then no discount will be applied. The payment amount due will be full – $100,000.
Other terms like 2/10 net 30
It is not necessary that this term credit will be favourable for all businesses. For some businesses, if it strengthens cash flow then for some businesses, it may be even difficult to survive with such discounts. Some businesses can also experiment by offering better early payment discounts and ensure quick payments.
So if you are considering early payment discounts it is better to analyze how much discount won’t cause a cash crisis, what is standard for your industry, how late payment can impact your business and other such financial factors. Accordingly, you can choose term credit.
Here are some trade terms alternative to 2/0 net 30. Opt that suits your business the best:
1/10 net 30
The 1% 10 net 30 calculation means the buyer or the customer will get a 1% discount on the total invoice amount if the payment is made within 10 days. Or else, the total amount is due within 30 days.
2/15 net 30
It means the buyer or the customer will be offered a 2% discount on the total invoice amount if the payment is made within 15 days. Or else, the total amount is due within 30 days.
2/10 net 45
It means the buyer or the customer will be offered a 2% discount on the total invoice amount if the payment is made within 10 days. Or else, the total amount is due within 45 days.
3/10 net 30
It means the buyer or the customer will be offered a 3% discount on the total invoice amount if the payment is made within 10 days. Or else, the total amount is due within 30 days.
3/20 net 60
It means the buyer or the customer will be offered a 3% discount on the total invoice amount if the payment is made within 20 days. Otherwise, the total amount is due within 60 days.
Net 20 EOM
No discounts. The customer is expected to make the full payment within 20 days after the end of the month.
Having your payment discount terms in writing can resolve a lot of issues. It is the best practice to include on invoice 2/10 net 30 or any other payment terms to make the customer aware about the payment due period and also let them know the benefit of paying earlier.
2/10 net 30 credit benefit
Both from the seller’s perspective and the customer’s perspective early payment discounts can be a great benefit. Trade credits are often provided to generate more frequent and high-volume of sales. Offering discounts like 2/10 net 30 can not only attract huge sales but will also guarantee businesses with quick or timely payments. High-profit margin companies can take good advantage of trade credits.
Customers appreciate the advantage of a 2% discount and they are likely to invest more. It also builds the trust factor among customers while businesses are confident about timely payment. So overall this strengthens the customer relationship.
2/10 net 30 credit disadvantages
Everything has a downside and so does 2/10 net 30 terms too. The biggest disadvantage of this payment term is that no instant payment can be expected for sales. Since the due period is 30 days, there are chances of delayed payment.
Startups, freelancers and small businesses who are dependent on cash flow cannot benefit with such early payment discounts. Sometimes, it may also lead to bad debts which can be a bigger risk.
Shortening due days like Net 15 or Net 21 can probably workout.
The invoice payment terms are very crucial for businesses. Ultimately, it is about exploring payment options, testing different scenarios and opting which suits the best. Net 30 is standard, not mandatory, so businesses have the flexibility to pick any preferable term credit, shrinking to Net 15 to extending to Net 90.
Longer the payment is delayed, badly your cash flow will be affected, particularly for freelancers and budding small businesses. Pick suitable invoice payment terms and see how your sales boost, cash flow increases and your overall business witnesses growth.