Definition
A discount offered to customers who pay before the due date, such as 2/10 net 30.
Why it matters
Compare the cost of early-pay discounts with factoring fees before choosing.
Where it shows up in a deal
The discount appears as a terms line on an invoice, such as 2/10 net 30, and in two separate conversations: whether to offer one to accelerate your own collections, and whether to take one a supplier offers you. Funders raise it because a discount granted is dilution, and dilution affects your advance rate.
What it affects
- Discounts you offer reduce the collected amount, so the shortfall comes out of your reserve.
- Discounts you take are often worth more than the cost of financing the earlier payment.
- Customers that take the discount and still pay late produce the worst of both outcomes.
- The real comparison is cost per day bought, not one percentage against another.
A worked example
Under 2/10 net 30 you give up 2% to be paid 20 days sooner: 2% / 98% = 2.04% for 20 days, roughly 37% annualized (2.04% x 365 / 20). Financing the same invoice at 1.5% per 30 days costs 1.0% for those 20 days.
The common mistake
Related terms
- Net TermsThe number of days a customer has to pay, such as net 30 or net 60.
- Discount RateThe fee a factor charges, usually expressed per 30 days or per 10-day increment.
- Accounts PayableMoney a business owes its suppliers and vendors.
- Days Sales OutstandingThe average number of days it takes to collect payment after a sale.
Questions about how early payment discount affects your facility?
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