Offering a client "2/10 net 30" — 2% off if they pay within 10 days, full amount due by day 30 — feels like a small, generous gesture. It rarely is. This calculator converts that discount into an effective annual interest rate, so you can see the real cost of buying faster cash before you put the term on an invoice.
How it works
Every early payment discount trades a slice of revenue for speed. The calculator first does the simple part: the discount amount is the invoice total times the discount percent, and the net amount after discount is what you'd actually collect if the client pays inside the discount window.
The more useful number is the effective annual rate. A 2% discount sounds trivial until you notice it buys you only 20 extra days — the gap between the 10-day discount window and the 30-day net term. Annualizing that trade-off is what turns 2% into a real interest rate: divide the discount percent by (100 minus the discount percent) to get the rate per period, then scale it up by how many of those 20-day periods fit into a 365-day year, and convert to a percentage. Offer the discount and a client takes it, and you've effectively paid that annualized rate just to get paid three weeks sooner.
If the discount window isn't actually shorter than the net term — say both are 30 days — there's no financing trade-off to annualize, so the effective rate reports as zero rather than a nonsensical or negative number. The same guard applies if the discount percent hits 100, which would otherwise divide by zero.
Worked example
Take the textbook case: an invoice for $1,000 on 2/10 net 30 terms.
- Discount amount: $1,000 × 2% = $20
- Net amount after discount: $1,000 − $20 = $980
- Discount window vs. net term: 30 − 10 = 20 days
- Effective annual rate: (2 ÷ 98) × (365 ÷ 20) × 100 = 37.24%
That's the number worth sitting with. You're giving up $20 on a $1,000 invoice to get paid 20 days earlier — and if that trade repeated all year, it would cost the equivalent of borrowing at roughly 37% annual interest.
How to interpret your result
The effective annual rate is not what any single client actually pays you in dollars — that's just the discount amount. It's a standardized way to compare the discount against your other financing options. If you could instead borrow working capital from a bank or line of credit at 10-15%, offering a discount that implies a 37% rate is an expensive way to solve a cash-flow problem, even though it feels informal and doesn't show up as "interest" on any statement.
That said, a high effective rate doesn't automatically make the discount a bad idea. It can still be worth offering if it meaningfully cuts the risk of a client paying very late or not at all, if it wins you a deal you'd otherwise lose on payment-term negotiations, or if a short, predictable cash gap is genuinely more expensive to you than the discount itself — a payroll date you can't miss, for instance. Compare the effective rate to your real alternatives before deciding, and remember it only costs you anything on the invoices where a client actually takes the discount; the rest cost nothing.
Methodology & sources
The formulas: discountAmount = invoiceAmount × discountPercent / 100, netAfterDiscount = invoiceAmount − discountAmount, and effectiveAPR = (discountPercent / (100 − discountPercent)) × (365 / (netDays − discountDays)) × 100, reported as 0 when the discount window isn't shorter than the net term or the discount is 100%. All figures round from unrounded intermediate math so the parts stay consistent with each other.
This is the standard trade-credit cost formula used across corporate finance and accounting education, typically shown with a 360-day convention; this calculator uses 365 days for a slightly more precise annualization. AccountingTools walks through the identical mechanics — dividing the discount percent by one minus the discount percent, then annualizing by the gap between the discount window and the net term — in its guide to credit terms and the cost of credit, which reaches 36.72% for the same 2/10 net 30 example using the 360-day version. Use this tool to compare the implied rate against your actual cost of capital before offering or accepting an early payment discount.