In reference to cash discounts offered between two businesses, what does 6/10, n/30 mean?

See Also:
2/10 Net 30 Example
Credit Sales
Letter of Credit
Line of Credit (Bank Line)
Net 30 Credit Terms
5 C’s of Credit (5 C’s of Banking)

2/10 net 30 Definition

2/10 net 30, defined as the trade credit in which clients can opt to either receive a 2 percent discount for payment to a vendor within 10 days or pay the full amount (net) of their accounts payable in 30 days, is extremely common in business to business sales. Anywhere a vendor offers credit terms it is likely that they also offer some discount to motivate early payment.
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2/10 net 30 Meaning

2/10 net 30 means a discount for payment within 10 days. The purpose of this is to shorten accounts receivable cycles for those who provide credit terms. This is essential when vendors have accounts receivable turnover cycles which exist longer than preferred. A business that offers a 2/10 net 30 discount is expressing that it is more important to have cash as quickly as possible than it is to have the full amount of their payable. The fact that lack of cash is one of the main reasons businesses fail makes these terms commonplace. Businesses love to offer 2/10 net 30 for 2 reasons: it makes customers happy while speeding up cash cycles.
Variations on this method include 2/10 net 40, 2/10 net 45, 2/10 net 60, 2/10 n 30 EOM (end of month), and more. These terms may also be referred to in a variety of terms: 2/10 n 45, 2/10 n 60, 2/10 days net 30, 2 percent 10 net 30 days.
The 2/10 net 30 discount makes no statement on the payment of bills beyond 30 days. Vendors may or may not have a late payment penalty for such customers. It is up to the discretion of the purchaser to decide the best method of closing accounts payable when 2/10 n 30 is available.
2/10 n 30 journal entries vary depending on the accounting method used. LIFO vs FIFO, accounting vs economic income, and many other matters make 2/10 n 30 accounting somewhat complicated. Strong company policies must be in place to ensure smooth bookkeeping.
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2/10 net 30 Formula

There is no single 2/10 net 30 formula. Despite this, 2/10 net 30 interest rate equations can often fall into this model:
If paid within 10 days:
Invoice Amount X 98% = 2/10 net 30 effective interest rate
If paid within 30 days:
Pay the invoice in full

2/10 net 30 Calculation

2/10 net 30 calculations are quite simple once understood fully.
The invoice amount is $10,000 and 2/10 net 30 accounting is in place.
If paid within 10 days, then:
$10,000 X 98% = $9,800 due with in 10 days
If paid within 30 days, then:
$10,000 is due
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2/10 net 30 is a trade credit offered by the seller to the buyer for their purchase. If a buyer is able to pay an invoice in full within the first ten days, they will receive a 2 percent discount on the net amount. Learn why this is important for your business cash flow.

Nurturing long-term relationships with suppliers as your business grows is a worthwhile investment. Consistently paying vendor and supplier invoices on time, if not before the due date, is the best way to build trust. Further, understanding how credit terms impact your business, as well as that of your suppliers, gives you an edge in contract negotiations.

Overview of 2/10 net 30

One beneficial credit term between a buyer and a seller to consider is 2/10 net 30. Simply put, 2/10 net 30 is a trade credit offered by the seller to the buyer for their purchase. If a buyer is able to pay an invoice in full within the first ten days, they will receive a 2 percent discount on the net amount. However, if a buyer misses the 10-day window, they must pay the full amount of the invoice on or before 30 days.

How is 2/10 net 30 calculated?

For example, if your business purchases goods on the first of the month for $100, your business has now entered into a credit agreement. If you are able to pay the invoice in full anytime from the 1st-10th of that month, you receive a 2 percent discount, here's the calculation:

Term Discount (100%-2%) * Invoice Amount ($100.00) = Reduced Payment ($98.00)

However, if you do not pay the full amount on or before the 10th, then $100 is the full amount due by the 30th. When considering 2/10 net 30, or any payment terms, it is important to keep in mind that weekends, holidays, and transit time are included, and not just business days.

Benefits and drawbacks of 2/10 net 30

When your business is healthy, being able to take advantage of savings opportunities keeps money in your pocket. And the more you are able to demonstrate timely payments, vendors will be more likely to extend terms and/or offer other advantages. However, it is always best practice to put your own business needs first. There may be times that paying early will cause cash flow problems that prohibit your own ability to purchase equipment or invest in product R&D. If faster payments impede your ability to take advantage of the discount, it's counter-productive.

More accounting tips: When do you need a W9 from a vendor?  

How to use 2/10 net 30 to your advantage

Suppliers who offer 2/10 net 30 are indicating that they prefer cash on hand to conduct their business. It is a win-win for the supplier who gains a market advantage over competitors as well as ensuring they have available means to conduct their business. A buyer who takes advantage of early payment discounts demonstrates that they understand the supplier’s needs. This relationship encourages a supplier to keep more product on hand, meaning your business doesn’t run into back-orders on the supply chain.

Similar payment terms

Payment terms are a good indication of the health of the relationship with that supplier, and 2/10 net 30 is just one credit option that a supplier may prefer. The longer the window of credit the more financial burden the supplier assumes. A supplier that sees the benefit of a relationship with a buyer may offer longer terms as a contractual incentive. Some examples of supplier terms are:

• Immediate payment: net due on receipt
• Non-discount terms: net 10, net 30, net 60
• Longer, short-term payment incentives: 3/15 net 60

Conclusion

As a small business owner, developing a good relationship with vendors is key to ensuring you have supplies on hand to continue to support your client base and take advantage of growth opportunities. While a supplier may be less willing to take on longer credit terms with a new buyer, as a business demonstrates the ability to avoid late payments, those terms can be negotiated giving you access to the benefits of short-term discounts and overall savings.

Learn more ways to strengthen relationships with your vendors:  

• Guide: Offer fast payments with RTP
• Blog post: A guide to vendor management

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