Early Payment Discount Calculator

How the calculator works

An early payment discount (also called a prompt payment or settlement discount) is usually written as shorthand. 2/10 net 30 means you can knock 2% off if you pay within 10 days; otherwise the full amount is due in 30. The question is whether those 20 days of keeping your cash are worth more than 2%.

A 2% saving for paying 20 days early isn’t a 2% return – it’s 2% earned over just 20 days. To compare it fairly with an overdraft or a savings account, the calculator annualises it:

Annual rate = discount ÷ (100% − discount) × 365 ÷ (days you pay early)

For 2/10 net 30 that’s 2 ÷ 98 × 365 ÷ 20 = 37.2% a year (about 44.6% compounded). Turning the discount down is equivalent to borrowing from your supplier at that rate. The calculator then compares the rate with what your cash earns and what borrowing costs you, in pounds, for this invoice.

Worked example

Tom runs a catering supplies wholesaler in Bristol. A packaging supplier sends a £12,000 invoice on 1.5/10 net 45 – 1.5% off for payment within 10 days, otherwise 45 days.

• Saving: 1.5% of £12,000 = £180, so he pays £11,820 on day 10 – 35 days early.
• Annual rate: 1.5 ÷ 98.5 × 365 ÷ 35 = 15.9% a year.
• From cash earning 4%: he gives up about £45 of interest, so he’s £135 better off.
• From his overdraft at 9%: 35 days of interest on £11,820 is about £102 – still £78 ahead.

The smaller discount spread over a longer period is worth far less than the classic 2/10 net 30, but it still beats both his savings and his overdraft. The only reason to refuse it would be if paying £11,820 five weeks early left him short for wages or HMRC.

Frequently asked questions

What does 2/10 net 30 mean?

Take a 2% discount if you pay within 10 days of the invoice; otherwise pay the full amount within 30 days. Other common terms include 1/10 net 30 and 2/10 net 60.

How do I work out the cost of not taking an early payment discount?

Divide the discount by 100% minus the discount, then multiply by 365 divided by the number of extra days you get by paying on normal terms. Compare the answer with your overdraft rate: if it’s higher, the discount is the better deal.

Should I use my overdraft to take an early payment discount?

Often, yes. Typical discounts work out at 15–40% a year, far above most overdraft rates, so borrowing for a few weeks to capture them usually leaves you ahead. The exception is when the overdraft is already near its limit – headroom you might need for payroll is worth more than the discount.

How does VAT work on a prompt payment discount?

Since 1 April 2015, VAT is due on the amount the customer actually pays. If you take a supplier’s discount, you can only reclaim the VAT on what you paid, not on the full invoice. Suppliers who don’t issue a credit note must show the discount terms on the invoice and state that the customer can only recover the VAT actually paid.

Does paying early hurt my working capital?

It shortens your creditor days, so cash leaves the business sooner. That is fine when you have headroom; if cash is tight, holding on to it may matter more than the saving. Our guide on whether to take an early payment discount or hold cash covers the trade-off in detail.

Related tools and guides

• Should you take an early payment discount or hold cash? – the full guide.
• DPO Calculator – see how quickly you currently pay suppliers.
• Working Capital Calculator – check you have the headroom to pay early.
• True Cost of a Hire Calculator – what a new employee really costs.
• Offering discounts to your own customers and still getting paid late? Work out the statutory late payment interest you can charge.

Sources

• HMRC VAT Valuation Manual VATVAL08500: prompt payment discounts (VAT on the amount paid from 1 April 2015; invoice wording)

For guidance only – not tax, legal or financial advice. The annual rate is a simple comparison tool; your own borrowing costs and cash position should drive the decision. Last updated 2 November 2026.