What is an early payment discount on an invoice?

An early payment discount is an incentive for prompt payment. The classic format is 2/10 net 30, meaning the customer takes a two percent discount if they pay within 10 days instead of the standard 30. The annualized cost of a two-percent discount for 20 days of acceleration is roughly 36 percent — which means customers with cheap working capital should almost always take it, and customers who take it are, by definition, paying faster.

For sellers, early payment discounts are a financing tool. Accepting a two-percent discount to receive cash 20 days sooner may be cheaper than a working-capital line of credit or the implicit carry cost of the receivable sitting unpaid. The math holds if the discount is tracked against the financing cost it is meant to offset.

Early payment terms need to appear clearly on the invoice and ideally in the underlying contract. Discounts taken without authorization, or applied after the discount window has closed, create reconciliation problems that outweigh the benefit of the original incentive.