An early-payment discount exchanges part of the invoice value for earlier cash. Compare the actual cash given up with the days accelerated before using an annualized rate.
Work through one invoice
A 5,000 invoice is normally due on day 30. Offering 2% off for payment on day 10 gives the customer a 100 discount. You receive 4,900 twenty days earlier. This example assumes the customer actually changes their payment date because of the offer.
Simple annualized cost = (100 ÷ 4,900) × (365 ÷ 20) = 37.24%
Use the early payment discount calculator with discount 2%, early day 10 and normal day 30. Its result is a simple annualization, not a loan APR and not a claim that the business loses 37.24% of the invoice.
Check the profit effect in money
If included delivery costs were 3,500, the invoice originally retained 1,500. After the discount it retains 1,400: 100 less, or a 6.67% reduction in retained amount. The new margin is 1,400 ÷ 4,900 = 28.57%, compared with 30% before.
If payment would have arrived on day 10 anyway, the discount buys no acceleration. If the customer pays on day 25 instead, the actual acceleration from day 30 is only five days. Use observed payment behaviour when evaluating the offer later.
Compare a concrete alternative
Suppose an available alternative costs a fixed 60 to make 4,900 available for the same twenty days, with repayment of 4,900 afterward and no other charges. On those hypothetical cash costs, 60 is less than the 100 discount. Access, conditions, fees and risk must also match; this example is not a financing offer or recommendation.
A discount that arrives after the payroll shortfall does not solve that shortfall. Place the proposed receipt in the dated cash forecast and confirm terms before including it as the expected outcome.
Method and scope
All amounts above are hypothetical teaching figures in one currency, excluding tax unless stated otherwise. These are original scenarios, not market prices, benchmark targets or professional recommendations. The references support the underlying concepts, not the example assumptions. This AI-assisted explanation has not had independent professional review. Calculation methods and limitations.
Frequently asked questions
Is 37.24% the amount lost on the invoice?
No. The example gives up 100 on a 5,000 invoice. The annualized figure expresses that cost over a twenty-day acceleration for comparison.
Should every customer receive the offer?
The arithmetic cannot determine that. Check whether it changes payment timing, what cash need it solves and how much contribution it gives up.
Sources & references
- Payment terms — Australian Government — business.gov.au
