Early-payment discounts: a 2% offer that costs 37% a year

The offer that looks cheap

Many owner-managed firms offer "2% off if paid within 10 days, net 30" to speed up cash. It feels small. Few people convert it into an annual rate, and the conversion is where the story sits.

The sum is simple. Customers who take the discount pay on day 10 instead of day 30, so you receive the money 20 days early and give up 2% of the invoice for it. Annualised, that is 2/98 × 365/20, or about 37.2% a year. Treat the discount as a loan from you to your customer, and you are lending at a price almost nobody would accept from a bank.

For illustration only (these are not real figures): a business with £1.5m turnover has 30% of sales, £450,000, paid with the 2% discount. The discount costs £9,000 a year. The cash arrives about 20 days early, which is on average roughly £24,660 of extra balance. Carrying that balance on an overdraft at 8% would cost around £1,970 a year. The discount costs more than four times as much as the borrowing it replaces.

Why the benchmark matters now

The Bank of England's page shows Bank Rate at 3.75%, with the next decision due on 5 November 2026 (Bank of England). Year-end negotiations are starting, and customers often ask for longer terms or a discount for paying fast.

The law gives a second yardstick. GOV.UK states that statutory interest on a late business-to-business payment is 8% plus the Bank of England base rate (GOV.UK). On today's base rate that is 11.75%, about a third of what the 2/10 net 30 discount costs you. That is a fact about the published rate, not legal advice, and a rate written into a contract can displace it, so check your own terms.

The fix: price the discount, then decide

Put each discount through the same calculation and compare the result with what your own money costs. Then ask whether the discount changes behaviour. If customers who already paid on time now take 2% for doing so, you have given margin away for nothing. If it moves a slow payer from 60 days to 10, it may be worth it. Where cash is genuinely tight, shorter terms, a deposit on larger orders, or clear late-payment terms usually cost less than a headline discount.

The same sum works in your favour

The calculation also applies when a supplier offers you 2/10 net 30. Taking it earns about 37% on the money you pay early. That beats most overdraft rates, so it is often worth taking even if you have to borrow to do it. The principle is the same either way: convert the terms to an annual rate and compare it with your cost of funds.

Tips and tricks for this week

• List every settlement discount you offer and every one you are offered. Note the percentage and the days.
• Convert each to an annual rate with 2/98 × 365/20 (adjust the numbers).
• Count how many discount-takers were already paying on time.
• Compare each rate with your overdraft or loan rate.
• Take supplier discounts whose annual rate is above your borrowing cost.

The average hides the story: a discount that looks like 2% is really a 37% loan. If you want to see which customers drive your margin, try the Business Health Check. One change, one date: pick one discount, price it, and review it by the end of the month.