Early Payment Discount & Factoring APR
Turn "2/10 net 30" or a factoring fee into the annual rate it actually is.
Replaces: Factoring brokers’ private spreadsheets
How to use it
Pick whether you are pricing a supplier’s early payment discount or an invoice factoring arrangement, enter the terms as they were quoted to you, and the calculator converts them into an annual percentage rate you can compare against ordinary borrowing.
Where the number comes from
- For a discount: the rate for the period is the discount divided by what you would actually pay — 2 ÷ 98, not 2 ÷ 100 — because the discounted amount is the sum being financed.
- That period rate is then annualised by the number of times the period fits into 365 days.
- For factoring: the fee is divided by the amount actually advanced, not the invoice face value, then annualised over the days until the customer pays.
- Other fees are added to the fee before annualising, since they are part of the cost of the same money.
- Nothing here compounds. These are simple annualised rates, which is the conservative direction — a compounded figure would be higher still.
What goes wrong
The part most calculators leave out.
- The comparison rates in the table are illustrative round numbers for context, not quotes. Your actual cost of borrowing is the only fair comparison.
- Factoring quoted per 30 days is often charged per 30 days or part thereof. A customer who pays on day 46 can trigger a second full period, roughly doubling the fee against what was modelled.
- Recourse matters more than the rate. Under a recourse arrangement you repay the advance if your customer never pays, which is a risk this arithmetic does not price at all.
- Taking every early payment discount is only correct if you have the cash. A discount at 37% annualised is still worse than missing payroll.
- This assumes the discount is genuinely available and the invoice is genuinely collectable. Neither is a given.
Why 2/10 net 30 is expensive to refuse
The terms look like a 2% saving. But you are not choosing between paying 100 and paying 98 — you are choosing between paying 98 today and paying 100 in twenty days’ time. That is 2 on 98, or 2.04% for twenty days. There are 18.25 such periods in a year, so refusing the discount costs about 37% annualised. Almost no business borrows at 37%. Companies decline this discount every day because the 2% looks small next to the cash it frees, which is exactly what the terms are designed to make you feel.
Questions
- What does 2/10 net 30 mean?
- Take 2% off if you pay within 10 days; otherwise the full amount is due in 30 days. The choice is whether keeping your money for the extra 20 days is worth 2% of the invoice.
- Why divide by 98 rather than 100?
- Because 98 is the amount you would actually hand over. You are effectively borrowing 98 for twenty days and repaying 100, so the interest is 2 on a principal of 98.
- Is factoring the same as a loan?
- Commercially it behaves like short-term borrowing against your receivables, but legally it is usually a sale of the invoice. That distinction matters for recourse, for your balance sheet, and for who chases your customer for payment.
- Does anything I type get sent anywhere?
- No. The whole calculation runs in your browser. Nothing is transmitted, stored, or logged, and there is no account to create.
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