3/7 EOM Definition
3/7 EOM (End of Month) is a type of trade credit term where the business owners can decide to have a 3 percent discount if the payment to vendor is made within 7 days of the following month in full instead of the seventh day of the second month.
How 3/7 EOM 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 3/7 EOM 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 3 percent discount if the supplier gets paid within 7 days of of the following month in full instead of the seventh day of the second month, when the bill would typically due. The first number in the term, in the above example is 3, 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 7 days to pay in order to get the discount. Finally, the abbreviation indicates when the discount period starts.
3/7 EOM Formula
The formula for 3/7 EOM trade credit is very simple.
If paid within 7 days of end of month:
3/7 EOM = Invoice Amount X 97%
If paid more than 7 days of end of month:
3/7 EOM = Invoice Amount X 100%
3/7 EOM Calculation and Example
Take for instance, a company X sets up a new credit policy using the 3/7 EOM 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 7 days of end of month and avail discount - $10,000 x 0.97 = $9,700. On the other hand, if they had not paid the company within the 7-day limit, they would have to pay the full net amount.