Glossary

2/10 net 30

2/10 net 30 is a special form of trade credit. The main trick goes as follows. The client pays the net (full) sum to the vendor within 10 days of 30 days account payable. That means he/she is eligible for a 10% discount. The main goal of this credit is to make account receivable periods shorter. This form of trade credit is widespread in the business-to-business environment.

If the seller offers this scheme, we have an important thing to understand. It’s more vital to receive cash in a shorter period of time, rather than the full amount. The vendors kill two birds with one stone. Firstly, they speed up the cash cycles. Secondly, they gladden customers with a discount.

There’s no sole 2/20 net 30 formula. Still, there is a scheme for the interest rate.

Should the client pay within ten days:

98% multiplied by invoice amount equals 2/10 net interest rate

Should the client pay within 30 days:

The full invoice amount is paid

Still, there’s a threat vendor may face offering trade credit. And its name is bad debt. The bad debt may occur if the client ends up paying late or not paying at all. So, to offer a 2/10 net 30 scheme, the seller needs to make an in-depth buyer check.

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