Early Payment Discount vs Borrowing Calculator
Enter the invoice terms and your borrowing or cash opportunity cost to see whether paying early is worth more than waiting. The calculator shows the implied annual cost of skipping the discount and the net dollar benefit of taking it.
Net benefit of paying early$135.56
- Discount savings
- $200.00
- Discounted payment
- $9,800.00
- Extra credit from waiting
- 20 days
- Annualized cost of skipping the discount
- 0.37%
- Effective annual cost
- 0.45%
- Cost to finance the early payment
- $64.44
- Break-even borrowing APR
- 0.37%
- Recommendation
- Pay early: the discount is worth more than the estimated financing or opportunity cost.
Financing cost assumes simple daily interest over the days between the discount deadline and the full-payment deadline.
Short payment intervals can make a modest cash discount annualize to a high implied rate.
How to use this calculator
- Enter the full invoice amount before any discount.
- Enter the discount percent and the deadline for taking it.
- Enter the normal net due date for the invoice.
- Enter the APR on the credit line or the annual return the cash could earn elsewhere.
- Compare the net benefit with the recommendation and the break-even borrowing APR.
How the early-payment discount is calculated
Supplier terms such as 2/10 net 30 mean the buyer may deduct 2% if payment is made within 10 days, or pay the full invoice on day 30. The discount looks small, but the decision is really about paying early in exchange for giving up the extra days of supplier credit.
Let A be the invoice amount, d be the discount percent as a decimal, t be net days minus discount days, and b be the borrowing APR as a decimal. The calculator uses these formulas:
S = A x d
P = A x (1 - d)
K = S / P = d / (1 - d)
R = K x (365 / t)
E = (1 + K)^(365 / t) - 1
F = P x b x (t / 365)
N = S - F
- S is the discount savings.
- P is the discounted payment due by the early deadline.
- K is the periodic cost of skipping the discount for one invoice cycle.
- R is the simple annualized cost of not taking the discount.
- E is the effective annual cost if that same decision repeated and compounded through a year.
- F is the estimated cost to finance the early payment.
- N is the net benefit of paying early.
What moves the decision
The spread between the discount deadline and the net deadline matters almost as much as the discount percent. A 2% discount for paying 20 days early implies a much higher annual rate than a 2% discount for paying 90 days early. That is why common terms like 2/10 net 30 often beat ordinary line-of-credit rates.
The borrowing APR or opportunity cost decides whether the discount is still attractive after financing. If your cost of cash is below the break-even borrowing APR, paying early has a positive estimated return. If it is above that break-even rate, waiting preserves cash at a lower cost than the discount is worth.
What this calculator leaves out
The financing-cost comparison assumes simple daily interest during the interval between the early deadline and the normal due date. It does not include origination fees, unused-line fees, minimum finance charges, taxes, late fees, bank transaction costs, disputed invoices, partial discounts, or supplier approval timing. It also treats the discount as applying to the full entered invoice amount and assumes the supplier will honor the stated terms.
Use the result as a planning estimate. Liquidity needs, covenant limits, working-capital policy, and the value of supplier relationships can change the practical decision even when the direct math favors paying early.
Worked example
Suppose an invoice is $10,000 with 2/10 net 30 terms, and the relevant borrowing or cash opportunity cost is 12% APR. The discount saves $200, so the early payment is $9,800. Waiting gives 20 extra days of supplier credit.
The periodic cost of skipping the discount is $200 / $9,800, or 2.0408%. Annualized over 20-day periods, that is 37.24% simple annual cost and 44.59% effective annual cost. Financing the early payment for 20 days at 12% costs about $64.44, leaving a net benefit of about $135.56. In this case, paying early is financially better before considering operational constraints.
Common questions
What does 2/10 net 30 mean?
It means the buyer may take a 2% discount if the invoice is paid within 10 days. If the buyer does not take the discount, the full invoice is due in 30 days.
How do I calculate the annualized cost of not taking a cash discount?
Divide the discount by the discounted payment amount, then multiply by 365 divided by the extra days of credit from waiting. For 2/10 net 30, the extra credit is 20 days and the simple annualized cost is about 37.24%.
Why is the implied APR on 2/10 net 30 so high?
The buyer gives up 2% of the invoice to keep cash for only 20 extra days. Repeating that short-period trade many times in a year turns a small invoice discount into a large annualized financing cost.
Should I borrow money to take an early-payment discount?
Borrowing can make sense when the financing cost for the early-payment period is lower than the discount savings. Compare your credit-line APR, including relevant fees, with the break-even borrowing APR shown by the calculator.
What interest rate makes an early-payment discount no longer worthwhile?
The break-even borrowing APR is the rate where the financing cost exactly equals the discount savings. It is the same as the simple annualized cost of skipping the discount.
Should I use my borrowing rate or my return on cash?
Use the cost of the money that would fund the early payment. If you would draw on a credit line, use that APR plus relevant fees; if you would use idle cash, use the return or value of the alternative use for that cash.