What Do the Credit Terms 2/10 n/30 Mean?
Demystify standard business payment terms to optimize cash flow and strategic financial planning.
Credit terms define the payment conditions agreed upon between a buyer and a seller for goods or services purchased on credit. These terms specify when payment is due and whether any discounts are available for early payment. Among the various arrangements, “2/10 n/30” stands as a common and widely understood example in business transactions. Understanding these specific terms is important for both parties involved in a sale.
The Discount Offer
The initial part of the credit term, “2/10,” presents a specific discount opportunity to the buyer. The “2” indicates a 2% discount on the total invoice amount.
The “10” signifies that the payment must be made within 10 days from the invoice date to qualify for this 2% discount. For instance, if an invoice is dated August 1st for $1,000, the buyer could deduct $20 ($1,000 x 0.02) if they pay by August 11th. The buyer would then only need to remit $980 to the seller.
The Full Payment Due Date
The second component, “n/30,” addresses the full payment obligation if the discount is not taken. Here, “n” or “net” indicates that the full invoice amount is due without any discount.
The “30” specifies that the full, undiscounted payment is due within 30 days from the invoice date. If the $1,000 invoice dated August 1st is not paid within the 10-day discount window, the full $1,000 becomes due by August 31st. Failing to pay within the 30 days can result in late fees and negatively impact the buyer’s credit standing with the seller and potentially with credit reporting agencies.
Financial Implications for Businesses
These credit terms have financial implications for both buyers and sellers. For buyers, taking advantage of the 2% discount offers a direct reduction in the cost of goods sold or services acquired, improving profitability. Forgoing the discount means paying an implied annual interest rate that is quite high for delaying payment for an additional 20 days. For a 2/10 n/30 term, this implied annual rate can be approximately 36.7%.
For sellers, offering “2/10 n/30” terms encourages faster collection of accounts receivable, which improves cash flow. Reduced collection periods for receivables allow businesses to more quickly reinvest funds. Prompt payments also strengthen customer relationships by fostering trust and demonstrating a commitment to efficient transactions.