The formulas
- Simple cost = d / (1 - d) x 365 / (net days - discount days)
- Compounded cost = (1 + d / (1 - d))^(365 / (net days - discount days)) - 1
How it works
Terms of 2/10 net 30 mean a 2 percent discount if paid within 10 days, otherwise full price by day 30. Skipping the discount is the same as borrowing 98 percent of the invoice for 20 days and paying 2 percent interest for it. That works out to 37.2 percent a year simple, 44.6 percent compounded.
If you can borrow on a credit line for less than that cost, borrowing to take the discount saves money. Paying after the net date lowers the implied rate on paper, but it strains the supplier relationship and can trigger late fees.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
Why divide by (1 - d)?
You keep 98% of the invoice when you skip the discount, so the 2% charge is on 98, not 100.
Should I use 360 or 365 days?
Both are used. 365 matches calendar time and is used here.
How does this apply to my customers?
Offering a discount is a costly way to borrow from them. Compare its cost with your credit line rate.
Formulas on this page are the standard definitions.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.