Invoice Payment Terms Calculator

How to evaluate invoice payment terms and early payment discounts

Invoice payment terms define when you expect to be paid after issuing an invoice. The most common terms include net 30 (full payment due in 30 days), net 60, and net 90. Early payment discount terms are expressed in shorthand such as 2/10 net 30, which means the customer can deduct 2 percent if they pay within 10 days, otherwise the full amount is due in 30 days.

The decision to offer an early payment discount involves a trade-off. On one hand, faster payment reduces the time your money sits in accounts receivable and improves your cash flow. On the other hand, you are accepting less than the full invoice amount. This calculator helps you understand whether that trade-off is worth it by comparing the holding cost saved against the discount given away.

The holding cost is calculated based on the days you would otherwise wait and your cost of capital. If you have a line of credit at 9 percent and you would have to draw on it to fund operations while waiting for payment, the holding cost of that invoice is the interest you would pay over those additional days. If the discount you offer is less than this cost, accepting early payment is the better financial outcome even though you receive less in total.

What are typical payment terms by industry?

Payment terms vary widely. Professional services firms and agencies often use net 30. Larger enterprise clients may demand net 60 or net 90 as a condition of doing business. Government contracts sometimes have payment cycles of 60 to 90 days or longer. Trade businesses, construction, and wholesale often use 30 to 45 day terms as a standard. Retail and ecommerce tends to be immediate or credit card based.

When should I offer an early payment discount?

Early payment discounts make the most sense when you regularly experience cash flow pressure between invoice issuance and payment. If you need to draw on credit to fund operations while waiting for large invoices to clear, the interest cost you pay on that credit may exceed the discount you give customers. In that case, the discount effectively pays for itself.

What is a reasonable early payment discount?

A 1 to 2 percent discount for payment 20 days early is a common range. The annualised cost of a 2 percent discount for paying 20 days early on a net 30 invoice works out to around 36 percent annualised interest, which is high from the customer's perspective and very favourable to you if they take it. Larger discounts erode your margin more significantly and should only be offered when cash flow pressure justifies them.