Trade Credit vs Cash Discount

Frequently Asked Questions

When does trade credit beat cash discounts?

If supplier offers "2/10 net 30" (2% discount if paid in 10 days, full price by day 30): annualized cost of NOT taking discount is ~37%. Almost always cheaper to take discount unless your cost of capital exceeds 37%. Rare exception: severe cash shortage.

How do I negotiate better trade credit terms?

Larger orders, longer relationships, prompt payment history, and competitive bids. Most suppliers can extend net 30 to net 60-90 for good customers. Trade credit is essentially free financing - leverage it before bank loans.

Should I always pay early?

Only if cash discount exceeds your cost of capital (typically yes). Otherwise hold cash for working capital, opportunities, or interest income. Pay on the last day of net terms, not earlier. Build relationships through reliability, not early payment.

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How This Calculator Works

Suppliers often offer terms like "2/10 net 30" - take a 2% discount if you pay within 10 days, otherwise the full amount is due in 30. This tool compares the dollar value of taking the discount against the cost of paying early (the opportunity cost of using your cash 20 days sooner, at your funding or financing rate). Enter the invoice amount, discount percentage, both payment windows, and your cost of capital; it tells you which option leaves you better off and by how much.

The True Cost of Skipping a Discount

Forgoing an early-payment discount is almost always one of the most expensive forms of financing a business can use. The annualized cost of passing on "2/10 net 30" is roughly: (discount % ÷ (100 − discount %)) × (365 ÷ (net days − discount days)). For 2/10 net 30 that's about 37% APR. Even "1/10 net 30" works out to ~18%. Unless your cost of capital exceeds that figure, taking the discount beats holding the cash.

When to Take the Discount

Take it when the implied annualized discount rate is higher than your borrowing rate or the return you'd earn on the cash - true in the vast majority of cases.

Skip it only if you are genuinely cash-constrained and the alternative is missing payroll, defaulting on debt, or borrowing at an even higher rate than the discount's implied cost.

Consider a line of credit: if your revolver costs 8–12% APR and the discount is worth ~37% APR, drawing on the line to capture the discount is profitable arbitrage.

Cash-Flow Considerations

The math favors taking discounts, but liquidity is real. Paying every invoice on day 10 instead of day 30 compresses your payables cycle and can strain working capital, especially for seasonal businesses. Model the discount decision alongside your cash-conversion cycle: if accelerating payments forces expensive emergency borrowing or risks a covenant breach, the headline APR comparison understates the true cost.

Negotiation & Practical Tips

If you consistently pay early, negotiate a larger standing discount rather than taking it ad hoc.

If cash is tight, ask suppliers for longer net terms (net 45/60) instead of a discount - sometimes more valuable than the 2%.

Automate: flag discount-eligible invoices in AP so you never miss the window by accident - a missed 2/10 discount is pure lost margin.

Track "discounts lost" as a KPI; it directly quantifies money left on the table each period.

Trade Credit vs Cash Discount

Frequently Asked Questions

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