Early Payment Discount
Definition
A price reduction a supplier offers in exchange for the buyer paying an invoice sooner than the standard due date, commonly expressed as terms like 2/10 net 30.
In Practice
Terms of 2/10 net 30 mean the buyer may deduct 2 percent by paying within 10 days instead of the full 30. That 2 percent for paying 20 days early annualizes to roughly 36 percent, far above most companies' cost of capital, so buyers with available cash usually come out ahead by taking the discount. For suppliers, it is an expensive but fast way to accelerate cash flow without borrowing.
Capturing discounts requires operational discipline: invoices must be received, matched, and approved fast enough to beat the discount window. Companies with slow approval workflows routinely forfeit discounts they negotiated. Dynamic discounting platforms generalize the idea, letting buyers and suppliers agree variable discounts based on exactly how early payment is made.
Example: a buyer negotiates 1.5/15 net 45 with a packaging supplier on 8 million dollars of annual spend. By automating three-way matching so invoices approve within a week, it captures 120,000 dollars in discounts per year.
Related Calculators
Related Terms
The contractually agreed timing and conditions for paying supplier invoices, such as net 30 or net 60 days, often including any discounts for early payment.
Supplier NegotiationThe structured process of reaching agreement with suppliers on price, terms, and conditions, using preparation, market data, and leverage to secure the best total-value outcome.
Purchase OrderA legally binding commercial document a buyer issues to a supplier specifying the items, quantities, prices, delivery dates, and terms of a purchase.