A supplier offers 2% off if you pay within ten days instead of thirty. Two percent sounds small. It isn't, and the arithmetic is worth doing once properly.
Reading the notation
2/10 net 30 means: deduct 2% if you pay within 10 days, otherwise the full amount is due in 30. It is one of several payment term notations that reward being read carefully.
You will also see 1/15 net 45, 3/10 net 60, and plenty of variations. The shape is always the same — a discount rate, the window to earn it, and the normal term.
The annualised cost
The 2% is not the number to judge it by. What you are really being offered is the use of your supplier's money for the extra 20 days, at a price.
The standard formula:
Discount ÷ (100 − discount) × (365 ÷ days gained)
For 2/10 net 30:
- Discount 2, so 2 ÷ 98 = 0.0204
- Days gained: 30 − 10 = 20
- 365 ÷ 20 = 18.25
- 0.0204 × 18.25 = 37.2% annualised
Turning down that discount is equivalent to borrowing at roughly 37% a year. Almost no business has a cheaper alternative use for the cash, which is worth remembering when a rising DPO is being reported as a win.
| Terms | Days gained | Annualised cost of not taking it |
|---|---|---|
| 1/10 net 30 | 20 | 18.4% |
| 2/10 net 30 | 20 | 37.2% |
| 2/10 net 45 | 35 | 21.3% |
| 3/10 net 30 | 20 | 56.4% |
| 1/15 net 60 | 45 | 8.2% |
The pattern: the shorter the extra credit period, the more expensive it is to give up the discount. A 1/15 net 60 offer is genuinely marginal. A 3/10 net 30 offer is close to free money.
The condition everyone skips
All of this assumes you can actually pay within ten days, which assumes the invoice is received, read, coded, queried if necessary, approved and scheduled inside ten days.
For a lot of businesses that is the binding constraint, not the cash. If invoices are entered in a weekly session and approvals take another week, the ten-day window has closed before anyone has looked at the document. The discount was never available in practice, only on paper.
This is where the discount question stops being a treasury decision and becomes a processing one. A business that enters invoices on arrival has ten usable days. A business that enters them monthly has, on average, about four — and often none.
Worth checking before negotiating for discount terms: how long does an invoice currently take to get from arrival to approved? If that number is above the discount window, the terms are decorative.
When not to take it
When cash is genuinely tight. 37% annualised is expensive credit, but it is available credit with no facility fee, no covenant and no conversation with a lender. If the alternative is an unauthorised overdraft or missing payroll, take the longer terms and pay the implicit interest.
When the discount is conditional on things outside your control. Some offers require payment cleared by day ten rather than initiated, which with certain payment methods is not the same date.
When it damages the relationship. Occasionally suppliers offer discounts they cannot afford and later resent. Rare, but worth noticing if a small supplier's terms look unsustainable.
When you would take it by short-paying an unresolved query. Deducting a discount on an invoice you are disputing creates two problems on the same document.
The reverse: being offered nothing
If no supplier offers you a discount, it is worth asking a few of the larger ones. Suppliers with cash flow pressure are frequently willing to trade a couple of percent for twenty days, and many have a standard arrangement they simply do not advertise.
The ask is stronger if you can demonstrate you pay reliably and quickly. Which, again, is a processing question rather than a financial one.
Getting the accounting right
A settlement discount taken changes the VAT position, because the consideration for the supply has changed. In the UK the supplier should either issue a credit note for the discount and the related VAT, or the original invoice should show the discounted terms and what to do if they are taken.
What you must not do is deduct the discount from the gross and leave the VAT as originally invoiced. That overstates your input VAT by the VAT on the discount.
Check current HMRC guidance on prompt payment discounts rather than relying on this page — the treatment was changed some years ago and older advice still circulates. If a supplier's invoice doesn't make the treatment clear, ask them how they intend to handle it before you take the deduction.
The short version
- Annualise before judging. 2% over 20 days is not 2%.
- Anything above about 15% annualised is worth taking if cash allows.
- The discount is only real if your process can clear an invoice inside the window.
- Fix the processing time first, then negotiate the terms. In that order.
Cribble reads invoices as they arrive rather than in a monthly session, which is what makes a ten-day discount window usable rather than theoretical. Extracted data goes through your approval chain and posts to Xero as a coded bill once someone has signed it off.