Early payment discounts speed up cash collection, but they're effectively an interest rate you're paying to get paid sooner — whether that trade is worth it depends on what the cash is worth to you right now.
The implied annual cost of a standard discount
A 2/10 net 30 term (2% off if paid within 10 days, otherwise due in 30) means you're giving up 2% to get paid 20 days earlier than the standard term. Annualized, that works out to roughly:
For 2/10 net 30: (2 ÷ 98) × (365 ÷ 20) ≈ 37% annualized — a surprisingly high implied interest rate for what looks like a small 2% discount.
When offering one makes sense anyway
- You have a higher-return use for the cash: if faster cash lets you avoid a more expensive short-term loan or line of credit, the discount can be cheaper than the alternative financing cost
- You're cash-constrained: for a business genuinely short on working capital, getting paid in 10 days instead of 30 (or later, given how often "net 30" actually means "net 45+" in practice) can be worth a real cost
- You want to reduce collection risk: faster payment reduces the window in which a customer's financial situation could deteriorate before you're paid
When it's not worth it
If you're not cash-constrained and don't have a specific high-return use for the cash 20 days sooner, a 37%+ implied annual rate is an expensive way to buy speed — most businesses in this position are better off not offering the discount and simply enforcing standard terms consistently.
A cheaper alternative: shorter standard terms
Rather than offering a discount, consider simply shortening your standard terms (net 15 instead of net 30) for new customers, or requiring deposits for larger invoices — this achieves faster cash collection without paying an implied 37% rate for it.
Frequently asked questions
Do most customers actually take the discount? Take-up rates vary widely by customer type and cash position — well-capitalized customers often skip it since 2% isn't meaningful to them, while cash-constrained ones are more likely to take it, meaning you may be subsidizing exactly the customers most likely to pay late otherwise.
Is there a standard discount percentage? 2/10 net 30 is the most common convention, but there's nothing forcing that specific number — calculate the implied APR for any discount/days combination before offering it.
Use the Invoice Discount Calculator to compute the implied annualized cost of any early payment discount terms you're considering.