2/10 Net 30 Definition
2/10 net 30 is a type of trade credit where the business owners can enjoy a 2 percent discount if the payment to vendor is made within 10 days or pay the full amount in 30 days. The tactic is very popular in the trade industry where vendors offer discounts as an incentive for early payments.
How 2/10 Net 30 Works
Usually when the goods are delivered, the supplier gives trade credit for specific number of days, e.g., 30, 60 or 90 days. At times, a supplier may give a discount as an incentive if the business pays within a certain period of time. A supplier that offers a 2/10 net 30 discount is indicating that it is more important to have cash as quickly as possible than it is to have the full amount of their payable. This credit term is very important for cash-strapped businesses and also provides businesses a method to manage non-payment risk.
For example, the business gets a 2 percent discount if the supplier gets paid within 10 days of issuing a 30-day credit. The first number in the term, in the above example is 2, will always be the percentage discount offered on the total invoice amount upon early payment. The second number represents the number of days of the discount period, which means the business has 10 days to pay in order to get the discount. Finally, the third number reflects the invoice due date for full payment.
2/10 Net 30 Formula
The formula for 2/10 net 30-trade credit is very simple.
If paid within 10 days of invoice date:
2/10 net 30 = Invoice Amount X 98%
If paid more than 10 days of invoice date:
2/10 net 30 = Invoice Amount X 100%
2/10 Net 30 Calculation and Example
Take for instance, a company X sets up a new credit policy using the 2/10 net 30 formula. Customer A purchases products from the company X on credit spanning for 30 days. The amount for the total purchase is $10,000.
However, the customer A manages to pay back the company X within 10 days and avail discount - $10,000 x 0.98 = $9,800. On the other hand, if they had not paid the company within the 10-day limit, they would have to pay the full net amount.
Business Considerations for Early Payment Discount - 2/10 Net 30 Term
As a buyer, there are several ways to evaluate whether or not to take advantage of a discount for early payment. Since discount terms like 2/10 net 30 are a type of short-term loan, businesses need to consider their cash needs versus the cost of credit as factors in their decision making process. A discount of 2% for paying 20 days early equates to an annual interest rate of approximately 37%.
In practice, early payment terms are taken when the buyer has sufficient cash balance or readily available source of funds. However, buyers that operate with little cash balance and limited access to capital might want to forgo the early payment discount.
There are many variations on early payment discount: 1/10 net 30, 2/10 net 40, 2/10 net 45, 2/10 net 60, 3/7 EOM (End of Month), 2/15 Net 40 ROG (Receipt of Goods) and more.
What are the Benefits of Offering Trade Credit?
For the supplier, the biggest benefit of the trade credit is to facilitate frequent and higher volume sales. The customers are usually attracted to flexible payment methods and enjoy the discounts they manage to avail.
In many ways, the procedure improves the cash flow for the seller, especially those who are part of the small to mid-sized business organization.
On the other hand, the buyer enjoys the ability to make a purchase without immediate payment. And of course, the discount is also a tempting offer for many buyers.
The Best Way to Ensure Risk-free Trade Credit
Although, some suppliers assume that this method could improve the payment transactions from their ‘ill-paying clients’, it is a better idea to only offer the discount to the ‘best clients’ only. The clients who are prone to delayed payment may abuse the discounted terms and continue to pay slowly.
On the other hand, the customers who have always acknowledged to your payment terms will continue to pay in a timely manner and even enjoy a better relationship with your business.