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Payment terms and early payment discount: what two per cent really costs

Von Johanna Brecht, Redakteurin für Verbraucherfinanzen · 9.9.2026 · 9 Min. Lesezeit

The same line sits on almost every supplier invoice, and almost nobody does the sum: “2% discount for payment within 10 days, net 30 days”. Two per cent reads like a tip. It is not.

Take that discount and you pay twenty days earlier, and you keep two euro out of every hundred. Annualised, that is roughly 36.7 per cent. For comparison, an overdraft facility on a business current account (Kontokorrentkredit) costs somewhere between eight and fourteen per cent, depending on the bank and on your standing with it. There is hardly any short-term use of spare cash in a normal business that comes close.

The mirror image holds just as firmly. Offer your own customers two per cent for paying early and you are buying twenty days of liquidity at an annual rate of 36.7 per cent. That can be the right call. It should be a decision, though, and not a habit inherited from whoever set up the invoice template.

Why two per cent turns into thirty-seven

The arithmetic is simpler than it looks. The two per cent does not buy you a year. It buys you the days between the discount deadline and the due date. With “2%, 10 days, net 30” that is twenty days. Twenty days fit eighteen times into a commercial year of 360 days. Eighteen times a little over two per cent gives roughly thirty-seven.

The precise formula:

discount rate ÷ (100 − discount rate) × 360 ÷ days gained

So 2 ÷ 98 × 360 ÷ 20 = 36.7 per cent.

The denominator is where most rules of thumb go soft. The widespread short version, “rate × 360 ÷ days”, divides by 100 and lands at 36.0 per cent. That is too low, because you save the two per cent on money you never transfer at all: you pay 98, not 100. At three or four per cent the gap stops being cosmetic.

A few sets of terms, calculated on 360 interest days:

The last row is the one worth staring at. Stretch the net term far enough and even a generous discount rate falls to a level an overdraft line can beat. An early payment discount is not automatically a good deal. What decides it is the number of days you gain, not the percentage printed on the paper.

When taking the discount pays

Two numbers settle the question: the annualised value of the discount, and the interest rate on your overdraft. If the discount is worth more, taking it is the cheaper side of the trade, even where you have to draw on the facility to fund it. At ordinary terms that is nearly always the case.

Which is why the interest rate is rarely the real constraint. The size of the facility is. Draw the facility to its ceiling to catch discounts and the next unexpected invoice finds you with no room, and a permanently exhausted overdraft is something a bank notices at the next credit review. So do not price the single invoice. Price the month. If every discount deadline falls in the same week, the outflows stack on top of one another, and a decision that was correct invoice by invoice becomes uncomfortable in aggregate.

There is a middle path plenty of businesses overlook. Early payment can be restricted to the ten largest supplier invoices, with everything else left on net terms. The saving sits in the volume, not in the number of invoices, and a short list is far easier to run on time than a policy covering every payable in the ledger.

What a payment term is actually allowed to be

On the other side of the desk sits the customer who dictates a long term. German law draws a line here that too few suppliers know about.

That line sits in Section 271a(1) BGB (Bürgerliches Gesetzbuch, the German Civil Code). Push payment beyond 60 days from receipt of the counter-performance – the goods or services you supplied – and the term holds only where it was expressly agreed and is not grossly unfair in the light of your interests. Both conditions have to hold at once. A clause buried in the small print of an order confirmation is not an express agreement.

Where your customer is a public authority, the rule tightens. Anything beyond 30 days needs objective justification, and more than 60 days is invalid (Section 271a(2) BGB). As a rule, an agreed inspection or acceptance period may not run beyond 30 days from receipt of the counter-performance either (subsection 3).

If such an agreement is invalid, the contract does not fall with it. The statutory due date applies instead. In practice: a customer pressing 90 days on you, without that ever having been expressly agreed, stands on thinner ice than he believes. That is not a reason to pick a fight with a good account, but it is a reason to know where you stand before the next negotiation.

Taking the discount late: the quiet trap

In some trades it passes for a minor sin: deducting the discount even though the deadline has passed. Seen from the receiving end it is nothing minor. It is an underpayment. The remaining claim stays open, and your supplier can chase it.

The expensive part comes afterwards. In the payment experience data that suppliers report to credit agencies, a deduction like this shows up as an incomplete payment. And in the Creditreform Bonitätsindex (business credit index), the score kept by Germany's largest business credit agency, payment behaviour carries 25 per cent, more weight than any other single factor. A 96 euro discount taken without entitlement can end up costing more than the sum itself. Not because anyone goes to court over it, but because it lands on the one characteristic that carries a quarter of your rating.

The part accounting often gets wrong

A discount deduction is no side issue for VAT. It reduces the consideration, and with it the taxable amount changes: under Section 17(1) UStG (Umsatzsteuergesetz, the German VAT Act) the supplier has to correct the VAT it owes, and the customer has to correct its input VAT at the same time. Both belong in the return period in which the change occurred, which is the month of payment, not the month of the invoice.

In practice that means: book the discount as a plain revenue reduction, leave the input VAT untouched, and the return is wrong. At two per cent on a six-figure annual figure, that is no longer a rounding item.

The second place it regularly snags: the discount is calculated on the gross amount of the invoice, not on the net. And not every line is eligible. Freight charges and pass-through items are frequently excluded. Where your suppliers handle this differently from one another, it is worth reading the relevant terms of delivery before the payment run starts deducting automatically on every invoice it sees.

When a customer takes a discount that does not exist

The reverse case turns up more often than people expect. Your invoice offers no discount, the customer deducts two per cent regardless and transfers the rest. What you have then is an underpayment, not an agreement.

The effective response is the unexcited one: chase the balance, with no debate about what is customary in the trade. Once the remaining claim has been made due and goes unpaid, default interest runs on it at nine percentage points over the base rate, and the 40 euro flat fee is triggered too. On a deduction of 96 euro, the flat fee alone costs almost half of the advantage the customer helped himself to.

What to avoid is the silent write-off. Tolerate deductions of that kind for three years and you have effectively agreed to them, and on the fourth occasion you are arguing about an established practice rather than about a single invoice.

Step by step

1. Look up your overdraft rate. The current figure is on your bank statement or in your bank's schedule of prices and services. Without that number, every discount comparison is guesswork.
2. List your ten largest suppliers with the discount rate, the discount deadline and the net payment term for each.
3. Work out the annual rate per supplier. Use the precise formula above, or the early payment discount calculator.
4. Sort the list. Everything above your overdraft rate belongs on the take-the-discount list.
5. Check the month, not just the invoice. Where all the discount deadlines fall in the same week, work out whether the facility carries it.
6. Look at your own terms. What does the discount you grant cost you? At 2% on 20 days it is 36.7 per cent a year, which is a high price for early money.
7. Meet the deadline or leave the discount alone. A deduction after expiry is an underpayment, not a negotiation.

What FIAON takes on

Your business makes its own discount decisions, and that needs no service provider. What FIAON takes on sits one level below: obtaining the company and owner credit report, going through the payment experiences that have been reported, and challenging entries that were not permitted. Otherwise the first sign that a discount dispute has left an incomplete payment in your file is a supplier quietly changing your terms. If a company card is meant to smooth the timing between outgoing and incoming payments, FIAON puts the application together. Whether the card is issued, and with what limit, remains the issuer's call.

What does not work

The calculator compares interest rates, not business relationships. Whether a supplier moves you up the queue when capacity is tight, because you have paid inside ten days for years, appears in no formula, and it is sometimes worth more than the two per cent.

Nor can an early payment discount be introduced unilaterally. Deduct without an agreement and you have underpaid. And anyone who considers a payment term too long to be valid should settle that in writing before simply invoicing earlier.

The three sentences that matter

Two per cent for twenty days gained is 36.7 per cent a year, more than any overdraft line, so it is almost always worth a look. Granting the same discount yourself is one of the most expensive ways there is to pull money forward. And between businesses, a payment term beyond 60 days is valid only where it was expressly agreed and is not grossly unfair.