Definition
An early payment discount is a small percentage taken off the invoice total if the client pays before a set early deadline. The most common form is 2/10 Net 30: a 2 percent discount if paid within 10 days, otherwise the full amount is due in 30 days.
Also called: 2/10 Net 30, Prompt payment discount, Cash discount
Early payment discount in practice
The discount costs margin but can shorten average collection time dramatically, especially with large clients whose accounts payable systems automatically capture discounts. A 2 percent discount for 20 days of earlier payment is roughly a 36 percent annualized rate, so it is expensive to offer on every invoice.
State the discount terms exactly on the invoice, including the deadline date, and show both the discounted and full amounts to avoid confusion.
Example
A $5,000 invoice with 2/10 Net 30 terms can be settled for $4,900 if paid within 10 days. After day 10, the full $5,000 is due by day 30.
Frequently Asked Questions
What does 2/10 Net 30 mean?
The client gets 2 percent off if they pay within 10 days of the invoice date. If they miss that window, the full invoice amount is due 30 days from the invoice date.
Are early payment discounts worth it?
They are worth it when faster cash is more valuable to you than the discount, for example to cover payroll or avoid borrowing. For very reliable fast payers, there is no need to offer one.