Taking Early-Payment Discounts from Suppliers

The math

2/10 net 30 means 2% discount for paying 20 days early. Annualized: (2% / 98%) × (365 / 20) ≈ 37.2% per year. Even a 1/10 net 30 discount annualizes to about 18%.

Compare that to your business line of credit at 8-12% APR. Borrowing on the line to capture every 2/10 discount is an immediate spread of 25 percentage points or more. Few financial decisions in a small business are this clear.

When to skip the discount

If cash is genuinely tight and the line of credit is maxed, paying full price preserves liquidity for must-pay items (payroll, taxes, rent). If the discount is offered but the supplier doesn't enforce it (i.e., they'll still credit the discount even if you pay on day 20), you have a free option to delay.

Also skip discounts on small invoices where the bookkeeping cost of tracking the discount window exceeds the savings. Generally, automate discount-taking on invoices over a threshold (e.g., \$1,000) and ignore it below.

When to take the discount

The standard 2/10 net 30 discount translates to roughly 36% APR. Anything cheaper than that — your line of credit at 9%, your savings account at 4% — means taking the discount is a positive-NPV trade. For small businesses with working-capital lines, taking offered early-pay discounts is one of the highest-return uses of borrowed money available.

The exception is when cash itself is constrained. If taking the discount means tripping a covenant or being unable to make payroll, the math changes — you're effectively borrowing at the discount rate to avoid a much larger consequence. In those cases, deferring the discount is correct even though the standalone trade would otherwise be profitable.

Operationally, capturing discounts requires a tight AP process. Invoices have to be approved and processed within the discount window, which often means a 5-day SLA from receipt to scheduled payment. Many companies leave money on the table simply because their approval workflow is slower than the discount window — fixing that workflow is usually the cheapest finance-team improvement available.

Track captured-discount dollars as a separate line on the monthly finance report. Making the savings visible turns it into a metric the AP team is proud of and the controller defends in board meetings. Many businesses leave six-figure discount opportunities on the table simply because no one has eyes on the number.