Financial
2/10 Net 30 formula: implied annualized cost of skipping trade discounts
Annualize the illustrative cost of foregoing an early-payment discount using simple and compounded conventions.
Why skipping a 2% 10-day discount costs 44.59% compounded annually!
Paying $100 on day 30 instead of $98 on day 10 costs $2 for retaining $98 for 20 additional days.
On a 365-day convention, the simple annualized rate is 37.24%; repeatedly compounding the same opportunity gives about 44.59%.
| Trade Credit Terms | Extra Days Held | Simple APR | Compounded Effective Rate |
|---|---|---|---|
| 2/10, Net 30 | 20 days | 37.24% | 44.59% |
| 2/10, Net 60 | 50 days | 14.90% | 15.89% |
| 1/10, Net 30 | 20 days | 18.43% | 20.13% |
Compounded Effective Rate and Simple APR of trade credit
Compare like-for-like rates, including fees and compounding. The example comparison below uses an effective annual borrowing rate.
=ROUND((1 + A2 / (1 - A2)) ^ (365 / (C2 - B2)) - 1, 4)Simple (non-compounded) annualized trade credit APR
Standard textbook approximation: (Disc / (1 - Disc)) * (365 / (NetDays - DiscDays)).
=ROUND((A2 / (1 - A2)) * (365 / (C2 - B2)), 4)Additional worked calculation
Using the initial example data:
=IF(((1 + A2 / (1 - A2)) ^ (365 / (C2 - B2)) - 1) > D2, "Discount has higher implied rate", "Borrowing rate is not lower")Inputs and interpretation
Assume 0 <= discount < 1 and net days greater than discount days. This uses a 365-day annualization convention. Effective annual rate assumes repeated opportunities at the same terms. Compare borrowing and discount costs on the same compounding and day-count basis, including fees and available liquidity; the example label is only a rate comparison.
Try the example
Use the original values or change them to test your understanding.