What is a cash discount on an invoice (e.g., 2/10 net 30)?

Cash discounts incentivize customers to pay invoices early by offering a small percentage reduction in exchange for fast payment. The classic notation is something like 2/10 net 30 — this reads as a 2% discount if the invoice is paid within 10 days, otherwise the full amount is due in 30 days. Other common terms include 1/10 net 30, 3/10 net 60, or 2/15 net 45.

The math on cash discounts often surprises people. A 2% discount for paying 20 days early is, on an annualized basis, equivalent to about 36% APR. From the customer's perspective, taking the discount is almost always cheaper than borrowing the same money on a credit line. From the seller's perspective, the discount is essentially the cost of accelerating cash collection — and for businesses with tight working capital, that acceleration can be worth more than the discount itself.

Cash discounts work best when the customer base has a real choice between paying early or paying on terms, and when the seller's cash flow benefits materially from the acceleration. They work poorly when most customers were going to pay on time anyway (the discount becomes pure margin loss) or when the discount is so small that customers ignore it (1/30 net 60 is rarely effective).