Supplier terms contain an implicit financing price.
An early-payment discount exchanges cash today for a lower invoice amount. Forgoing it is economically similar to borrowing the discounted amount until the full payment date and paying the discount as financing cost.
Compare the available saving with the cost of funding the earlier payment. The effective annual rate repeats the same interval mathematically; it does not claim that identical invoices or reinvestment opportunities recur all year. Liquidity constraints, supplier reliability and payment disputes remain separate decisions.
The formula, made clear.
- Payment gap
- Full payment day less discount payment day; strictly positive.
- Financing charge
- Discounted invoice × annual simple borrowing rate × gap/year days.
- Net saving
- Discount saved less the modeled financing charge, before any lender fees.
Put the numbers in context.
On a $100,000.00 invoice with 2/10 net 30 terms, early payment is $98,000.00 and saves $2,000.00. Financing that payment at 12% simple interest for 20 days on a 365-day basis costs $644.38.
| Input | Example value |
|---|---|
| Full invoice amount | $100,000.00 |
| Early-payment discount | 2% |
| Discount payment day | 10 days |
| Full payment day | 30 days |
| Annual simple financing rate | 12% |
| Annual day-count basis | 365 days |
| Net saving after modeled financing | $1,355.62 |
What this calculation assumes
One fully eligible invoice; all dates are elapsed days from the same invoice. No VAT/tax treatment, compounding borrowing cost, lender fees, late-payment penalties, partial settlement or supplier default. The comparison does not imply an entitlement to the discount.
Methodology references
What to consider next.
Compare the net saving with your cash floor. A favorable implied rate is not sufficient if early payment jeopardizes the next payroll or a debt payment.
How we approach financial models →