Early Payment Discount Calculator
Offering customers a discount to pay early — like 2/10 net 30 — feels cheap, but the implied annualised cost is often surprisingly high. This calculator converts your discount terms into an effective rate per annum so you can compare it against your real cost of funds before deciding.
Discount terms
Offering this discount brings payment forward by 20 days.
What "2/10 net 30" really costs you
A prompt-payment discount looks small — 2% feels like a rounding error — but when you annualise it, the implied cost is high. Giving up 2% to be paid 20 days early works out to roughly 37% per annum. That is the rate you are effectively paying to bring the cash forward, and it is usually far higher than the cost of simply borrowing the money or waiting the extra 20 days.
The discount can still be the right call when cash flow is genuinely tight, when the alternative funding is more expensive, or when the discount materially improves the odds of being paid at all. Compare the annualised cost above against your real cost of funds before deciding.
This calculator is for illustrative purposes only — not financial or accounting advice. The benchmark cost of funds shown is a generic estimate and will differ from your actual borrowing or opportunity cost. Seek professional advice before setting your payment terms.
The early payment discount trade-off
An early payment discount is a simple bargain: you give up a slice of the invoice in exchange for getting paid sooner. The catch is that the slice is permanent while the time saved is small. With 2/10 net 30 you surrender 2% of the invoice to be paid just 20 days early, which annualises to roughly 37% per annum. Measured as a cost of finance, that is expensive — most overdrafts, invoice finance, and credit lines sit well below it.
When the discount is still worth it
Despite the headline rate, the discount can make sense. If your cost of funds is genuinely higher than the calculated figure, paying early is cheaper than borrowing. It can also be justified when cash flow is critically tight, or when offering the discount materially improves the likelihood of being paid by a customer who would otherwise drift well past terms. The right answer depends on your numbers — use the verdict above as a starting point.
The alternative: enforce your terms
If the discount is expensive and your customers are reliable, the cheaper option is usually to hold your terms and chase the slow payers. A clear letter of demand and consistent follow-up often recovers the full invoice without giving anything away. Where a debtor still won't pay, Merion pursues the full balance on a commission-only basis, so you keep the discount and recover the debt.
Note: the benchmark cost of funds used in the verdict is a generic figure. Substitute your own borrowing or opportunity cost for a decision specific to your business.
This is an indicative calculation only — not financial or accounting advice. The benchmark cost of funds is a generic estimate and may not reflect your actual cost of capital. Seek professional advice before setting or changing your payment terms.
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