Anyone who’s ever worked in the B2B world knows that when it comes to invoicing, there’s more than one way to settle a bill. While general consumers are most used to paying upfront or using a layaway or buy-now-pay-later model, in the business world, there are endless options.
Most businesses are used to invoice net terms such as net 30, 45, 60, and even 90. This simply means that you have a certain number of days from the date of receiving an invoice to pay the remaining balance. But sometimes when requesting a trade credit, you can get even more favorable terms. For example, do you know the 2/10 net 30 meaning and how to calculate 2/10 net 30?
Why Are Net Terms Popular?
Net terms aren’t new features and have been a major part of the business world for centuries. Working with terms often gives businesses the flexibility they need to allocate working capital to finance purchases and recoup funds that would otherwise be tied up in expenses and make operating a business impossible or very difficult.
For example, a clothing store purchases inventory on net 30 terms from a retail vendor. This means that within 30 days of receiving the inventory, they need to settle the invoice. But within those 30 days, the store can sell the inventory, thereby generating revenue to not only cover the cost of the goods but to earn a profit — assuming that they purchased at wholesale prices and sold the goods using retail pricing. By the time the 30-day period ends, the store can settle its outstanding invoice and potentially purchase more merchandise from that vendor or use that profit to invest in other avenues.
2/10 Net 30 Explained
While basic net 30 terms are considered relatively favorable given the flexibility they provide, there’s more than one way to maximize the value of net terms. In particular, depending on a company’s creditworthiness, they may also be extended the bonus of a 2/10 trade credit opportunity.
If your business is offered an invoice with terms of 2/10 net 30, it means that while you have 30 days to settle your debt, you can pay less if you pay it off sooner. Specifically, if you pay your net 30 invoices within 10 days of receipt, you could get a two percent discount on the total cost of your bill.
Calculating the 2/10 Discount
Calculating 2/10 net 30 payment terms discounts are fairly easy to do. Keep in mind that the “2” represents the two percent discount while the “10” denotes the terms of the incentivized period.
So, if you have a $10,000 bill with a vendor that’s due in 30 days, if you pay it in 10 days, you would only have to pay $9,800. In theory, that 2% discount might not seem like a lot. But if you have several vendors offering you a favorable 2/10 discount off of net 30 terms, those savings can add up over time.
While there are a few different formulas offered for calculating 2/10 net 30 payment terms, there are two easy ways to do it. First, consider 100% of the value of the invoice and subtract two to determine the discounted amount. Then multiply 98% times the total value of the invoice to determine what you’ll spend if you pay within 10 days of receipt.
100% – 2% = 98% x $10,000 = $9,800
Alternatively, you can simply multiply your total invoice amount by the discounted percentage (2%) to determine how much you’ll save off the total price of your order. Then subtract that from the total invoice value to calculate the final expense if you pay within the discounted window.
$10,000 x 2% = $200
$10,000 – $200 = $9,800
Put simply:
- Total invoice value: $10,000
- Invoice date: May 1
- Due Date: 30 days from receipt or May 31
- Payment terms: 2/10 net 30
- Discount Period: 10 days
Why Would a Business Offer Trade Credits?
In theory, it might seem counterintuitive for a business to offer trade credits after already agreeing to net terms. But just like a corporate customer enjoys net terms because it offers more flexibility, the same can be said for a business offering trade credits.
Boosting Customer Acquisition & Retention
Net 30 terms are fairly standard across business industries. But if you’re trying to encourage larger or more frequent orders, trade credits can be a nice incentive. Especially for customers with effective accounting departments who make timely payments, the option for a discounted invoice could be the deciding factor between picking your business over a competitor.
And it can also encourage customer loyalty at a time when that’s not as common as in the past. Over time, offering trade credit can boost sales, helping to minimize the financial loss you’re potentially experiencing on every order that’s settled within 10 days of issuing an invoice.
Better Liquidity
For a business offering trade credits, encouraging people to settle their debts with you faster also means you can get paid faster. That translates to you settling your operational expenses faster such as payroll, commercial lease expenses, and more. And similar to the retail store that needs the flexibility to plan for future activities, you now have more liquidity to work with.
The Downside of Trade Credits
As with any other financial product, trade credits aren’t always a winning solution. If you offer trade credit to a customer with a poor credit or payment history, there’s no guarantee that you still won’t find yourself chasing for payment after the 10-day grace period or 30-day net term period ends. So, it’s always good to think carefully before extending ultra-favorable terms to a potential customer.
And of course, there’s the reality that you’re taking a slight loss on every order with 2/10 terms attached. Depending on the size of your customer orders, or the frequency with which they’re being placed, it may not be a lucrative option.
Should Your Business Offer 2/10 Net 30 Terms?
Ultimately only you know whether your business is ready to begin extending 2/10 net 30 terms to customers. Before offering them blindly to every customer, make sure that they’re creditworthy and aren’t likely to leave you chasing for payment well after the net 30 term period has expired. Likewise, be sure that you have enough liquidity to support accepting reduced payments if customers respond favorably to the opportunity.
Should Your Business Accept 2/10 Net 30 Terms?
Similar to the business owner offering you these terms, only you know if this will work for your business model and current liquidity scenario. Don’t accept 2/10 net 30 terms if you don’t think you can — at a bare minimum — settle your invoice within the 30-day term. And if you want to capitalize on the incentivized discount period, be sure you have the liquidity to cover the discounted 98% invoice value without struggling in other areas of your business.
