We’ve already discussed the ups and downs of Net 30, but today we’d like to talk about a special form of it: 2/10 Net 30.
2/10 Net 30 is a sort of trade credit that allows business owners to offer a discount to customers if they pay their invoices in full within a certain amount of time.
What do the numbers mean?
The ‘2’ in 2/10 Net 30 stands for 2%, while the ’10’ represents 10 days. And, as we mentioned previously, the ’30’ in 2/10 Net 30 means 30 days.
Therefore, 2/10 Net 30 means that you will give your customers a 2% discount if they pay the invoice in full within 10 days. If they pay after 10 days and on or before 30 days, they must pay the invoice in full with no discount.
For example, if you supply 10 office chairs to your client for $100 each, then the invoice amount would be $1000. That amount is due in full on or before 30 days after the invoice is submitted.
However with 2/10 Net 30 terms, if the client pays within 10 days, he won’t have to pay $1000. Instead, he would only have to pay $980.
Variations on 2/10 Net 30
As you may have wondered, yes, it is possible to use different numbers (and payment terms) with this discount incentive.
Another popular form is 1/10 Net 30, 2/15 Net 30, and so on. The Net days may also increase to 40, 45, 60, or even go as low as 15.
The Advantages of 2/10 Net 30
When we talk about the advantages of 2/10 Net 30, we can also apply that for the most part to advantages related to other variations.
The main and most important advantage is that you get to offer the client a lower charge in order to get payment earlier.
This is great for the client because he or she gets to pay a lower amount for the same product or service.
And, of course, it is great for you because you get to have your invoices paid faster and thereby increase your cash flow.
The Disadvantages of 2/10 Net 30
The disadvantages are not too severe for the supplier, depending on your business’ financial status.
Here, you are sacrificing 2% (or whatever discount you chose), which is nonetheless an amount of money that you can find useful in your business.
As mentioned above, the client has some great advantages here, and it is good that there is pressure on him or her to pay faster. Essentially, by offering a 2% discount for payment within 10 days, you are also by extension adding a percentage charge for any payment received after 10 days.
However, if the client’s company does not have great cash flow, it could be dangerous for him or her to pay earlier. If there isn’t a sufficient amount of funds in the company, the client could lost the supplier’s trust .
The supplier can then decide to eliminate the 2/10 Net 30 terms, or even go so far as to eliminate Net 30 terms completely.
For a cash-strapped client, this means that payments should be submitted as soon as the products or services are delivered. In total, that could mean the end of their business.
Therefore, if you are a client, you should consider deeply whether you are able to pay 2/10 Net 30 terms.