What Do the Credit Terms 2/15 n/30 Mean?

Credit terms are an important aspect of business-to-business transactions, defining payment conditions for goods or services. The term “2/15 n/30” is a widely used example of credit terms in invoicing. Understanding these specific terms is important for both buyers and sellers, as it impacts cash flow management and financial decision-making.

Breaking Down the Components

The credit term “2/15 n/30” is a shorthand for specific payment conditions on an invoice. The initial “2” indicates a 2% cash discount offered on the total amount of the invoice. This incentive aims to encourage prompt payment from the buyer.

The subsequent “15” specifies the discount period, meaning the buyer has 15 calendar days from the invoice date to pay and qualify for this 2% reduction. If payment is made within this window, the buyer can deduct 2% from the total amount due. The final part, “n/30,” signifies “net” and “30” represents the maximum credit period. This means the full, undiscounted invoice amount is due within 30 calendar days from the invoice date if the early payment discount is not taken. This period provides the deadline for payment without incurring late fees or penalties.

Calculating and Applying the Discount

Applying “2/15 n/30” terms involves a calculation based on the invoice amount and timeline. For example, if a business receives an invoice for $1,000 with these terms, taking the discount means calculating 2% of $1,000, which equals $20, so the buyer would pay $980 ($1,000 – $20) to settle the invoice.

To qualify for the reduced payment, the buyer must ensure payment is received by the seller within the 15-day discount window, starting from the invoice date. The timing of payment, whether by receipt or postmark, should align with the agreed-upon terms. If the 15-day period passes without payment, the discount is forfeited. The full $1,000 invoice amount then becomes due by the 30th day from the invoice date, with no reduction applied.

The Rationale Behind These Terms

Businesses frequently offer “2/15 n/30” terms to achieve financial and operational objectives. For the seller, providing a discount for early payment serves as an incentive to accelerate cash flow. This strategy helps reduce the time accounts receivable are outstanding, improving liquidity and lowering collection costs.

From the buyer’s perspective, taking advantage of the 2% discount represents a financial opportunity. This effectively reduces the cost of goods or services purchased, which can enhance profit margins. Paying early to capture the discount is an attractive proposition for buyers with sufficient working capital.