What Does the Payment Term 2/10 n/30 Mean?

Payment terms define how a buyer pays a seller for goods or services. They specify the timeframe for payment and any incentives or penalties. By extending credit, businesses facilitate commerce, allowing customers to receive products or services before making full payment. This arrangement helps manage cash flow for both parties, making transactions more flexible and accessible.

Understanding Each Component

The payment term “2/10 n/30” is a common trade credit notation that conveys invoice payment details. The “2” signifies a 2% discount offered on the net amount of the invoice.

The “10” indicates the number of days from the invoice date within which the buyer must pay to qualify for the discount. This period is often referred to as the discount window.

The letter “n” stands for “net,” meaning the full, undiscounted amount of the invoice.

Finally, the “30” specifies the total number of days from the invoice date by which the entire net amount is due if the discount is not taken. This is the ultimate deadline for payment.

Applying the Discount

To calculate the discounted payment, the buyer multiplies the total invoice amount by the discount percentage (2%) and then subtracts this calculated discount from the original amount. For instance, if a business receives an invoice for $1,000 with these terms, a 2% discount amounts to $20 ($1,000 x 0.02). Paying within the 10-day window would then require a payment of $980 ($1,000 – $20).

The deadline for this discount is within 10 days of the invoice date. If payment is made on or before the tenth day, the buyer pays the reduced amount. If the discount is not taken within this timeframe, the full net amount becomes due. The buyer then has until the 30th day from the invoice date to pay the full, undiscounted amount.

The Business Rationale

Businesses utilize “2/10 n/30” terms for strategic and financial objectives benefiting both seller and buyer. For the seller, offering a discount incentivizes customers to pay invoices more quickly. This accelerates payments, improving cash flow and providing funds for operations, suppliers, or reducing short-term borrowing. Prompt payment also reduces the risk of delinquent accounts or bad debt.

From the buyer’s perspective, taking advantage of the “2/10 n/30” discount represents a cost saving. This saving directly improves profitability by reducing the expense of purchased goods or services. Not taking the discount is like incurring a high annualized interest rate, often estimated around 36.7% for the 20 days between the discount period and the final due date. Therefore, capturing these discounts can be a smart financial decision.