What Does Credit Terms of 2/10 n/30 Mean?
Learn the essential meaning of "2/10 n/30" credit terms. Grasp how these common invoice conditions dictate payment schedules and potential savings.
Credit terms are an agreement between a seller and a buyer defining payment conditions for goods or services. They establish the payment period and any discounts for early settlement. A common example on invoices is “2/10 n/30,” which provides specific payment instructions. Understanding these terms helps businesses manage cash flow and make informed financial decisions.
The Discount Offer
The first part of the credit term, “2/10,” refers to a discount for prompt payment. The “2” indicates a 2% discount on the total invoice amount. This percentage reduces the gross amount owed, incentivizing earlier payment.
The “10” specifies the number of days from the invoice date to qualify for this 2% discount. For instance, if a $1,000 invoice carries “2/10 n/30” terms, paying within 10 days allows the buyer to deduct $20 (2% of $1,000). The buyer would then remit $980 to settle the invoice. This discount allows the buyer to save money and the seller to receive funds more quickly.
The Net Due Date
The second part of the credit term, “n/30,” establishes the payment deadline if the discount is not taken. The “n” stands for “net,” meaning the full, undiscounted invoice amount.
The “30” represents the total number of days from the invoice date by which the full amount must be paid. If the buyer does not pay within the 10-day discount window, the full invoice amount is due within these 30 days. This provides a standard credit period.
Applying the Credit Terms
When an invoice presents “2/10 n/30” terms, a business faces two primary payment choices. Consider an invoice for $5,000 with these terms. If the business pays within the 10-day discount period, they calculate a 2% discount, which is $100 ($5,000 0.02). The business would then remit $4,900 to satisfy the invoice.
Alternatively, if the business does not pay within 10 days, the discount opportunity is forfeited. The decision to take the discount often depends on a business’s current cash flow. While saving $100 on a $5,000 invoice is beneficial, a business with tight liquidity might prefer to hold onto its cash for the additional 20 days, even if it means paying the full amount. Taking such a discount can be a financially attractive option when cash is available.