# Credit terms of 2/10, n/60 means

2/10 net 30 is a trade credit offered by the seller to the buyer for their purchase. If a buyer is able to pay an invoice in full within the first ten days, they will receive a 2 percent discount on the net amount. Learn why this is important for your business cash flow.

Nurturing long-term relationships with suppliers as your business grows is a worthwhile investment. Consistently paying vendor and supplier invoices on time, if not before the due date, is the best way to build trust. Further, understanding how credit terms impact your business, as well as that of your suppliers, gives you an edge in contract negotiations.

### Overview of 2/10 net 30

One beneficial credit term between a buyer and a seller to consider is 2/10 net 30. Simply put, 2/10 net 30 is a trade credit offered by the seller to the buyer for their purchase. If a buyer is able to pay an invoice in full within the first ten days, they will receive a 2 percent discount on the net amount. However, if a buyer misses the 10-day window, they must pay the full amount of the invoice on or before 30 days.

### How is 2/10 net 30 calculated?

For example, if your business purchases goods on the first of the month for \$100, your business has now entered into a credit agreement. If you are able to pay the invoice in full anytime from the 1st-10th of that month, you receive a 2 percent discount, here's the calculation:

Term Discount (100%-2%) * Invoice Amount (\$100.00) = Reduced Payment (\$98.00)

However, if you do not pay the full amount on or before the 10th, then \$100 is the full amount due by the 30th. When considering 2/10 net 30, or any payment terms, it is important to keep in mind that weekends, holidays, and transit time are included, and not just business days.

### Benefits and drawbacks of 2/10 net 30

When your business is healthy, being able to take advantage of savings opportunities keeps money in your pocket. And the more you are able to demonstrate timely payments, vendors will be more likely to extend terms and/or offer other advantages. However, it is always best practice to put your own business needs first. There may be times that paying early will cause cash flow problems that prohibit your own ability to purchase equipment or invest in product R&D. If faster payments impede your ability to take advantage of the discount, it's counter-productive.

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Suppliers who offer 2/10 net 30 are indicating that they prefer cash on hand to conduct their business. It is a win-win for the supplier who gains a market advantage over competitors as well as ensuring they have available means to conduct their business. A buyer who takes advantage of early payment discounts demonstrates that they understand the supplier’s needs. This relationship encourages a supplier to keep more product on hand, meaning your business doesn’t run into back-orders on the supply chain.

### Similar payment terms

Payment terms are a good indication of the health of the relationship with that supplier, and 2/10 net 30 is just one credit option that a supplier may prefer. The longer the window of credit the more financial burden the supplier assumes. A supplier that sees the benefit of a relationship with a buyer may offer longer terms as a contractual incentive. Some examples of supplier terms are:

• Immediate payment: net due on receipt
• Non-discount terms: net 10, net 30, net 60
• Longer, short-term payment incentives: 3/15 net 60

### Conclusion

As a small business owner, developing a good relationship with vendors is key to ensuring you have supplies on hand to continue to support your client base and take advantage of growth opportunities. While a supplier may be less willing to take on longer credit terms with a new buyer, as a business demonstrates the ability to avoid late payments, those terms can be negotiated giving you access to the benefits of short-term discounts and overall savings.

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## What Do Credit Terms 2/10 Net 30 Mean?

Though invoices state the balance owed, more often than many realize, it’s possible to negotiate to pay less. Efficiently managing your accounts payable process means that you may be able to capture early payment discounts to help your small business save money.

An invoice states the credit terms or payment terms of a transaction, between the buyer (payer) and the seller (payee). A fairly standard credit term is net 30, which means the balance is due within 30 days of the invoice date – not when the transaction actually occurred.

## What is 2/10 Net 30?

2/10 net 30 means that buyers are eligible to get a 2% discount on trade credit if the amount due is paid within 10 days. After those 10 days pass, the full invoice amount is due within 30 days without the 2% discount according to the terms for 2/0 net 30.

## How to Calculate 2/10 Net 30

Take a look at this example to determine how much the credit customer pays:

Invoice full amount: \$1,000

Invoice date: September 1

Invoice due date:  30 days

Payment terms: 2/10 net 30

Discount period: 10 days

Begin counting the days from the day after the invoice date.

The quick formula is 100% -discount % x invoice amount

100%-2%= 98% x \$1,000 = \$980

Date of Invoice Payment: September 1 through September 11 Number of Days Before Paying: 0-10 Discount 2% – Discount Amount \$20 Payment Amount Due \$980

Date of Invoice Payment: September 12 through October 11 Number of Days Before Paying 11-30 Discount 0% Discount Amount \$0 Payment Amount Due: \$1,000.

​Trade credit is interest-free financing from a vendor. A customer pays later for billed purchases. In accounting, it is known as trade payables or accounts payable.

Vendors may include an interest rate for late payments made after the due date in the payment terms. However, suppliers may not collect the late payment finance charges on trade payables.

## What is the Net Method for Trade Credit Accounting?

Record the invoice balance less discount as a single net amount. The customer records a credit purchase and accounts payable. The vendor records the credit sale and accounts receivable.

Continuing with our example from above:

\$1,000 – \$20 discount = \$980 net amount recorded. These transactions are often automated with accounting software.

To record a purchase when a customer receives the goods:

Purchases: \$980

Accounts Payable: \$980

To pay the invoice included in the accounts payable balance early:

Accounts payable: \$980

Cash: \$980

If the company does not pay early, the entry is:

Accounts Payable: \$980

Purchase Discounts: \$20

Cash: \$1,000

Purchase discounts is a contra account to purchases but increases purchases if not paid early.

## What is the Gross Method for Trade Credit Accounting?

Record the invoice amount and discount in separate accounts. The customer tracks the total discounts taken, or the vendor tracks the discounts given. The amounts reduces purchases for buyers, or sales for sellers.

This example shows the bookkeeping for transactions for a customer purchases:

To record a purchase when the customers receives goods:

Purchases: \$1,000

Accounts payable: \$1,000

To pay the invoice included in the accounts payable balance early:

Accounts Payable: \$1,000

Early payment discounts on purchases: \$20

Cash: \$980

The early payment discount account is a contra account that reduces purchases.

From the seller’s side:

The seller will initially record sales and accounts receivable at the total amount. If the customer pays early, the seller records the sales discount as a debit in the sales contra account known as sales allowances. Sales allowances reduce sales in the income statement.

## What are Buyer-Initiated Early Payment Programs?

A buyer initiated early payment program is managed through accounts payable, using either the supply chain finance method or the dynamic discounting method.

If the seller doesn’t offer cash discounts upfront, the buyer can negotiate an early payment discount. If the buyer suggests a beneficial officer, the seller accelerates their cash flow if they accept. Buyers reduce spending.

### Supply Chain Method

Using the supply chain finance method, buyers borrow funds from a trade credit financier to pay the invoice under the terms of the early payment. The buyer pays back the third party, as this method is basically a loan. This finance technique offers flexibility when cash balances are low, but buyers want to avoid using a credit card because of high interest rates.

### Dynamic Discounting Method

With dynamic discounting, the buyers initiate an early payment offer on an invoice-by-invoice basis, where the discount varies. The buyer may offer a 2% discount to one seller and a 1.5 percent discount to another. Buyers who use this approach can leverage their excess cash.

Here are some payment terms on vendor and supplier invoices that are defined in a similar way:

• 2/10 net 45: 2% early payment discount within 10 days, or the total amount of the invoice due in 45 days.
• 3/10 net 30: 3% early payment discount within 10 days, or the total amount of the invoice due in 30 days.
• 3/20 net 60: 3% early payment discount within 20 days, or the total amount of the invoice due in 60 days.
• 2/EOM net 45: 2% early payment discount if paid by the end of the month or total amount due in 45 days.
• Net 20 EOM: The total amount is due for full payment within 20 days after the end of the month.

On credit sales, vendors often a 2% discount most often. Some vendors will charge finance charges or interest on overdue bills according to their invoice terms.

When it comes to implementing an early payment program, using either the supply chain finance method or the dynamic discounting method, organizations often find that it is easier said than done. The issue lies in how efficient the accounts payable workflow is. Businesses that rely on manual accounts payable processes will run into some common challenges regarding early payment discounts:

• Weak Buyer-Seller Relationship: For an early payment discount program to work, both buyers and sellers must adopt it. Building the relationship between buyer and seller takes time, and can be a challenge if contact only takes place when the client is onboarded and when tax documents are submitted. The lack of real-time visibility into payment status hinders a buyer’s ability to provide an accurate timeframe for delivery payment. This can affect the seller’s attitude and trust in participating in an early discount program.
• Lengthy Invoice Approval Process: The amount of time between receiving the invoice to approving the invoice is oftentimes outside the timeframe of 2/10 net 30, which prevents the buyer from taking advantage of the discount.
• Lack of Data: The buyers have to negotiate discount terms that are attractive to the seller that makes a difference in the profit margin. The discount has to be mutually beneficial. Finding the sweet spot takes visibility into multiple variables, such as: discounting liquidity constraints, third-party financing availability, buyer hurdle rate, and more. Manual accounts payable processes make it hard to see the data necessary for these variables, across all vendors.

## When to Use the Early Payment Discount

Early payment discounts make sense for buyers with access to a line of credit or supply chain financing, or those that have cash balances. Buyers need to compare any interest rates to the opportunity cost of not taking the discount. The seller receives cash and collects accounts receivable faster when the customer pays early, but it doesn’t make sense for all customers to pay early when they can pay on time and keep that working capital free in the meantime.

### What is it meant by 2 10 N 30 credit terms?

What is 2/10 net 30? 2/10 net 30 is a trade credit extended to the buyer from the seller. A buyer will receive a 2% discount on the net amount if they pay the invoice in full within the first ten days of the invoice date. Otherwise, the full invoice amount is due in 30 days without a discount.

### What does 2/10 mean with respect to credit terms of?

What is 2/10 Net 30? 2/10 net 30 means that buyers are eligible to get a 2% discount on trade credit if the amount due is paid within 10 days. After those 10 days pass, the full invoice amount is due within 30 days without the 2% discount according to the terms for 2/0 net 30.