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Early Payment Discount (Trade Credit) Calculator

Calculate the effective annual interest rate of forgoing an early-payment discount like '2/10 net 30'.

Result

Effective Annual Cost of Not Taking Discount
37.2%

If this rate is higher than your cost of borrowing, it's cheaper to borrow money (if needed) to pay early and capture the discount than to wait and pay in full.

About the Early Payment Discount

This calculator translates a trade credit term like '2/10 net 30' into an effective annual interest rate, showing what it actually costs a business to skip an early payment discount and pay on the full due date instead. It's aimed at accounts payable decisions where a supplier offers a small percentage off for paying early.

How It Works

You enter the discount percentage offered, the number of days you have to pay to earn it, and the number of days until the invoice is due in full. The calculator converts the discount into the cost of the extra credit period between the discount deadline and the final due date, then annualizes that cost using a 365-day year so it can be compared to a loan or credit line interest rate.

effectiveAnnualRate = (discountPercent/100 / (1 - discountPercent/100)) x (365 / (netDays - discountDays))

Formula & Methodology

The first term, discountPct / (1 - discountPct), converts the discount from a percentage of the discounted price into a percentage of the amount actually paid if you skip it - this is the true cost of the credit extension, not just the face discount. The second term, 365 / (netDays - discountDays), scales that single-period cost up to an annual rate by dividing the year by how many days of extra credit you're effectively borrowing for. Multiplying the two annualizes what would otherwise be a one-time cost.

Examples

Classic 2/10 net 30 terms

With a 2% discount, a 10-day discount window, and a 30-day net due date, the effective annual cost of not paying early works out to (0.02/0.98) x (365/20) = about 37.2% - a rate far above what most businesses pay to borrow.

Smaller discount, tighter window

A supplier offering 1% off for payment within 15 days on net-45 terms gives an effective annual rate of (0.01/0.99) x (365/30), or roughly 12.3%, meaning it's a much closer call against typical short-term borrowing costs.

Advantages

  • Converts a small-looking percentage discount into an annualized rate that's directly comparable to a credit line or loan interest rate
  • Makes the true cost of the specific extra-days window (net days minus discount days) explicit, rather than just quoting the headline discount
  • Requires only the three numbers printed on a supplier invoice, so it can be checked in seconds against real payment terms

Common Mistakes

  • Comparing the raw discount percentage (like 2%) directly to an annual interest rate instead of annualizing it first, which drastically understates the true cost
  • Forgetting that the discount applies to the discounted amount owed, not the full invoice, when estimating cash savings
  • Ignoring the note that this comparison only matters if the business would otherwise need to borrow to pay early - a business with idle cash captures the discount regardless

Edge Cases to Watch For

  • If net payment days is less than or equal to the discount period, the calculator returns an error, since there would be no extra credit period to annualize.
  • If the discount percentage is entered at or above 100%, the calculator blocks the result because the denominator (1 - discountPct) would hit zero or go negative.
  • The formula assumes the entire invoice amount is paid on one of the two dates; it does not account for partial early payments or discounts that scale with how early you pay.

Common Use Cases

  • An accounts payable team deciding whether to prioritize paying a specific supplier within its discount window
  • A small business owner comparing the cost of using a credit line to pay early against simply paying on the standard due date
  • A finance student or analyst working through how trade credit terms translate into an implied interest rate
Written & fact-checked by the Calculateus TeamLast updated August 5, 2026How we verify our formulas

Frequently asked questions

What does '2/10 net 30' mean?

It means you get a 2% discount if you pay within 10 days, otherwise the full amount is due in 30 days - skipping that discount is equivalent to paying a surprisingly high effective annual interest rate for the extra 20 days of credit, which is why capturing early payment discounts is often one of the highest-return moves available to a business with available cash.

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Conclusion

Because the annualization effect compounds seemingly small discounts into surprisingly high effective rates, this calculator is most useful for spotting supplier terms worth prioritizing with available cash. Compare the resulting rate against your actual cost of capital before deciding how to sequence payments.