2/10 Net 30
A payment term offering a 2% discount if paid within 10 days, otherwise full payment due in 30 days. Learn how it works, benefits, and calculations.
What is 2/10 Net 30?
2/10 Net 30 is a payment term where sellers offer buyers a 2% discount on an invoice if payment is made within 10 days. If the buyer doesn’t pay within this discount period, the full invoice amount becomes due within 30 days. This structure incentivizes early payments while giving buyers flexibility.
How It Works
- "2" = 2% discount available
- "10" = Discount applies if paid within 10 days
- "Net 30" = Full payment due within 30 days
For example, a $10,000 invoice paid within 10 days costs $9,800 (saving $200). If paid after 10 days but within 30 days, the full $10,000 is due.
Calculation Examples
Basic Formula
Discounted Amount = Invoice Amount × (1 - Discount%)
Example: For a $50,000 invoice:
- Discount: $50,000 × 2% = $1,000
- Amount due if paid early: $50,000 - $1,000 = $49,000
Annualized Return Calculation
The effective annualized return for taking the discount is calculated as:
Annualized Return = (Discount% / (1 - Discount%)) × (360 / (Net Days - Discount Days))
For 2/10 Net 30: = (0.02 / 0.98) × (360 / 20) ≈ 36.73%
This shows the high return on early payment, making it attractive if cash flow allows.
Pros and Cons
Pros for Buyers
- Cost Savings: 2% reduction on invoices.
- Improved Cash Flow Management: Predictable payment timelines.
- Stronger Supplier Relationships: Early payments build trust.
Cons for Buyers
- Cash Flow Pressure: Requires immediate liquidity.
- Risk of Missing Discounts: Late processing may lead to full payment.
Pros for Suppliers
- Faster Cash Flow: Accelerates receivables.
- Reduced Bad Debt Risk: Early payments lower default risk.
- Competitive Edge: Attracts buyers seeking discounts.
Cons for Suppliers
- Revenue Reduction: Discounts lower profit margins.
- Administrative Burden: Tracking discount periods adds complexity.
When to Use 2/10 Net 30
- Buyer Perspective: Use when cash flow is strong and AP processes are efficient.
- Supplier Perspective: Offer to improve cash flow or attract new customers.
- Industries: Common in B2B, manufacturing, wholesale, and services with high-volume transactions.
Net Method vs. Gross Method for Accounting
Net Method
- Records invoices at discounted amount upfront.
- If discount is missed, the difference is recorded as an expense (e.g., "Purchase Discounts Lost").
- Example: A $10,000 invoice is recorded as $9,800. If paid late, $200 is expensed.
Gross Method
- Records invoices at full amount initially.
- Discount is subtracted when payment is made.
- Example: Invoice recorded as $10,000; $200 discount is deducted upon early payment.
Alternatives to 2/10 Net 30
| Term | Discount | Discount Period | Full Payment Due |
|---|---|---|---|
| 1/10 Net 30 | 1% | 10 days | 30 days |
| 2/15 Net 30 | 2% | 15 days | 30 days |
| 3/10 Net 60 | 3% | 10 days | 60 days |
| Net 30 | 0% | N/A | 30 days |
Implementation Challenges
- Slow AP Processes: Manual approvals may miss discount windows.
- Lack of Visibility: Unclear deadlines lead to missed opportunities.
- Cash Flow Constraints: Early payments may strain liquidity.
- System Limitations: Invoicing or ERP systems without discount tracking features complicate execution.
Key Takeaways
- Buyers: 2/10 Net 30 offers significant savings but requires efficient processes and liquidity.
- Suppliers: Accelerates cash flow but reduces margins; use strategically to attract buyers.
- Best Practices: Automate AP workflows, track discount deadlines, and negotiate terms aligned with cash flow needs.