What is 2/10 Net 30?

2/10 net 30 is a short payment term used to incentivize the buyer in order to receive the payment as early as possible. Often labeled as a trade credit, 2/10 net 30 promises a 2% discount on the total amount if paid within the first 10 days, starting from the issue date.

However, if the recipient fulfills the payment after 10 days, they are not eligible to receive a discount. This means the entire amount needs to be paid before the completion of a 30-day period.

That’s how 2/10 net 30 benefits both, the buyer and the seller. The buyer can receive early payment discounts by completing the payment early. On the other hand, the seller can get paid without making any extra effort.

How Do You Calculate 2/10 Net 30?

Calculating 2/10 net 30 is as easy as mentioning the payment terms in an invoice. You only need the right formula to calculate the revised amount if your customer pays in 10 days. Make sure you have the correct date when an invoice was issued, mention of a 2/10 net 30 term, and the total outstanding invoice.

Here is the formula:

Total Invoice Amount × (100% – 2%)

So, by populating the formula with the data from an invoice, you will get the revised amount that the customer needs to pay after applying a 2% discount.

Let’s move on to a 2/10 net 30 example to understand what is 2/10 net 30.

2/10 Net 30 Example

Suppose your company is dealing with cash flow issues due to late payments from your customers. As a business owner, you authorize the use of trade credit to boost payments and ultimately fix the cash flow issues. So, your company issues a fresh invoice of $5,000 with a 2/10 Net 30 payment term to the customer.

Now, the recipient only needs to pay $4,900 ($5,000 – $100) if the payment is completed within the first 10 days from the issue date. However, they need to pay the full amount without a discount if they fail to pay within the first 10 days. This means once the 10-day period expires, the customer needs to pay $5,000.

Difference Between Net Method and Gross Method

The net method only records the discount price while the gross method accounts for the full price before taking off discounts. Such accounting methods for invoice discounts also apply to cash discounts, where customers pay less for using cash.

How the Net Method Works

The net method assumes the discount has been applied to the total amount. So, when the buyer makes a purchase, it is already recorded as whatever the discounted price, i.e. 98% of the amount mentioned in the invoice. Hence, no amendment is needed if the buyer pays the same amount in 10 days.

However, this isn’t the case if the buyer completes the payment after 10 days (but before the 30-day deadline), then an additional 2% amount needs to be recorded. This is because the buyer has paid the full amount without applying a discount, meaning the company needs to amend the previously added amount according to how much was paid.

How the Gross Method Works

Unlike the net method, the gross method is the accounting process where the full invoice amount is recorded, assuming the buyer will not benefit from the discount. Therefore, the reported amount only changes if the buyer makes payment in the 10-day (discounted period).

Suppose the buyer pays the invoice amount once the discounted period is over, i.e. after the 10 days, no changes are required. Simply, because the amount mentioned previously is the whole amount before taking off the discount.

These differences prove how the net and gross methods are two different sides of the coin

Other Trade Credit Terms

Apart from 2/10 net 30 terms, you can also use some other early payment terms to incentivize your customers and simultaneously, receive the payment in less time. Here are a few alternative trade credit terms to 2/10 net 30.

1/10 net 30

This trade credit term offers a 1% discount on the total invoice amount if the buyer pays the due amount within 10 days. However, if paid after 10 days, but during a 30-day period, the discount will no longer exist.

2/15 net 30

Using this trade credit term, the buyer can avail a 2% discount if they clear their dues in the first 15 days. Following a 15-day period, a discount disappears, meaning the buyer needs to pay the full invoice amount.

2/10 net 45

With 2/10 net 45 terms, a similar discount of 2% is offered if the buyer pays in the first 10 days. If a discount isn’t claimed, the buyer still has a 45-day period to clear the outstanding amount without any penalties.

3/10 net 30

The buyer can claim a 3% discount if an invoice carries a 3/10 net 30 payment term. However, the 3% discount on the total due amount is only applicable if the payment is made within the first 10 days of the total 30 days.

Advantages and Disadvantages of 2/10 Net 30

A trade credit term, 2/10 net 30 provides financial benefits to the buyer, but at the same time, it also has some drawbacks for companies.

Advantages of 2/10 Net 30

A 2/10 net 30 trade credit term benefits both, the buyer as well as the seller. The payment flexibility to clear the outstanding dues and a 2% discount as icing on the cake encourages the buyer to go for payment quickly.

On the other hand, the seller appreciates receiving payment well before the 30-day deadline as there are no more delays from the buyer side. The early payment further helps the seller to cover operational costs in a timely manner, keeping their daily operations up and running.

Thus, many businesses make the most of such trade credit terms to get rid of late payment issues.

Disadvantages of 2/10 Net 30

Although 2/10 net 30 helps the seller receive money early, the 2% loss is still unbearable. It means that 2% less of the actual amount will be received from credit sales. The business may incur greater losses if more customers continue claiming discounts on 2/10 net 30 invoices.

Similarly, the risk of bad debt looms over your business because the customer may not be interested in paying a bill once the discounted period is over. Therefore, the business needs to adjust the funds in advance to deal with bad debts.

When to Use 2/10 Net 30?

2/10 net 30 can be utilized if the business has a steady cash flow, ensuring smooth day-to-day operations. Your customers are likely to benefit from discounts, which means you will receive less from credit sales. So, you must be prepared prior to issuing a 2/10 net 30 invoice.

Businesses can also consider mentioning the trade credit term like 2/10 net 30 when sending invoices to reliable customers. This means customers may go for early discounts, eliminating chances of defaulting.

Startup businesses with permission to use lines of credit can use 2/10 net 30 or similar terms in the initial stages to lure more customers.

How to Generate Invoice With Clear Payment Terms on Moon Invoice

Creating an invoice with clearly highlighted payment terms can be done in 2 minutes or less when using Moon Invoice. The online invoicing software provides pre-designed invoice templates that will not only minimize your work but also inspire your customers to pay as soon as possible.

Unlike poorly-written invoices on paper, Moon Invoice helps you create an impressive invoice, so your clients can easily understand the payment terms.

Further, you don’t need extra time to collect payment in cash as Moon Invoice offers multiple online payment options. Integrate whichever payment method is convenient to your client and receive the payment without extending your wait times.

Here’s what you need to do:

👉Head to Moon Invoice & start using the invoice generator.
👉Enter the required invoicing details followed by your business details.
👉Next, type the client details along with product or service information.
👉Consider adding applicable taxes.
👉Lastly, describe the payment terms & conditions.
👉Save changes, review an invoice & share it online.

Notably, it is a completely free-of-cost process, making it a perfect choice for small businesses to create invoices on the go. However, if your requirement is more than just making an invoice, you need to purchase a subscription plan offering advanced features, 66+ ready-made invoice templates, one-click share, and much more.

Conclusion

2/10 net 30, in a nutshell, is a trade credit term utilized to incentivize the buyers while speeding up the payment collection. Simply put, 2 /10 net 30 meaning is if the buyer pays the due amount within 10 days, then they are eligible for a 2% discount, otherwise, they lose financial benefits. Although 2/10 net 30 is effective in payment collection, it also has certain drawbacks, which should not be overlooked.

Sometimes late payment challenges arise due to outdated invoicing methods. To get rid of them, what you need is state-of-the-art invoicing software like Moon Invoice. You can create professional invoices within minutes along with clear payment terms to draw clients’ attention and ultimately get paid. Grab a 7-day free trial to experience it yourself.

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