Early payment discounts: when paying early pays

If your accounts payable (AP) team pays every supplier invoice on its due date, it may be turning down one of the better short-term returns available to the business. This article is for UK and EU in-house finance teams at SMEs (small and medium-sized businesses) deciding whether to take a supplier’s early payment discount or hold the cash and pay on terms. It explains how to read the terms and annualise the discount, with a decision rule you can apply against your own cost of funds.

An early payment discount is a percentage taken off an invoice in exchange for paying before the full amount falls due.

Key takeaways

• An early payment discount is a short-term return on cash, so compare it with what that cash would otherwise earn or cost.

• Read the discount rate alongside its payment window, and check the full-payment deadline; treat the window as running from the invoice date unless the terms say otherwise.

• Annualise the discount over the days you give up, not over the full credit period.

• Take the discount when the annualised yield beats your marginal cost of funds and paying early won’t squeeze liquidity you need elsewhere.

• Stretching payables only wins when cash is the binding constraint, and it carries supplier costs the discount arithmetic doesn’t show.

What is an early payment discount?

From the buyer’s side, an early payment discount is a supplier offering to buy back a few weeks of credit at a stated price. The supplier sets the discount rate and payment window on the invoice, usually counting the window from the invoice date. The terms also specify a later date by which the full amount is due. Nothing is negotiated invoice by invoice. You earn the discount by paying inside the window and forfeit it by paying outside.

The same arrangement goes by several names. HMRC calls it a prompt payment discount, UK accounting texts say settlement or cash discount, German suppliers write Skonto, and French suppliers write escompte. Offering one is a commercial choice by the supplier.

For AP, the operative question is whether an invoice can clear approval and reach a payment run before the window closes.

How to read discount terms like 2/10 net 30

“2/10 net 30” means you get 2% off if you pay within 10 days of the invoice date, and otherwise the full amount is due within 30 days. The first two numbers give the discount and the window; “net 30” is the deadline for the undiscounted amount. Variants follow the same pattern: 1/10 net 30 offers a smaller discount for the same window.

UK and European terms are often written out in prose and sometimes tiered, and the same arithmetic applies to each tier separately.

The discount usually applies to the pre-VAT subtotal, so VAT follows the amount you pay.

A worked example on a £10,000 invoice

On a £10,000 invoice at 2/10 net 30, paying by day 10 costs £9,800 and paying on day 30 costs £10,000, so the discount is worth £200 for settling 20 days earlier. If that supplier bills you £10,000 every month and you take the discount each time, that’s £2,400 a year off one supplier account.

Per invoice, £200 looks small next to £10,000, which is why AP teams tend to decide by habit rather than arithmetic: they schedule invoices for the due date and overlook the £200. The comparison that matters is £200 against 20 days’ use of £9,800, because 20 days is all the credit you’re giving up.

What skipping the discount really costs: the annualised rate

Skipping a 2/10 net 30 discount costs roughly 36% to 37% a year. Here’s how the calculation works:

• The formula is d ÷ (100 − d) × 365 ÷ (T − t), where d is the discount percentage. T is the full credit period and t is the discount window.

• For 2/10 net 30 that gives 2 ÷ 98 × 365 ÷ 20, or 37.2% on a 365-day year and 36.7% on a 360-day year. The Association of Corporate Treasurers (ACT) uses 365 days for sterling, so UK teams should lean on the higher figure.

• The denominator is 98, because you’re financing £9,800, the amount you’d pay early.

• The day count is T − t, the 20 days you give up, so dividing over the full 30 days understates the cost.

Compounding each 20-day period across a year pushes the figure to about 44.6%.

The rate is high because 2% is the price of 20 days, and a year contains more than 18 of those periods. The ACT makes the same point with a smaller discount: 1.5% taken 32 days early works out at a 17.4% yield, which it calls “far more expensive than you might expect based on the headline number”. A headline figure of 1% or 2% hides the clock.

When should your team take the discount?

Taking the discount makes sense when its annualised yield beats your marginal cost of funds. That cost is whatever the £9,800 would otherwise do: the rate you’d pay to borrow it for 20 days, or the return you’d give up by not holding it. The Bank of England’s August 2026 Money and Credit release puts the effective rate on new loans to UK SMEs at 6.63% and new corporate time deposits at 3.47%. In the euro area, the ECB’s August 2026 interest rate statistics put revolving loans and overdrafts to corporations at 3.92%. Against a 37% yield, the gap is about 30 points. Even 1/10 net 30, which annualises to about 18.4%, clears those rates comfortably.

On yield alone, paying early almost always wins. The rule flips on liquidity rather than yield. Paying on terms instead makes sense when:

• Cash is the binding constraint and paying day 10 would leave payroll or VAT short; it could also put a loan covenant at risk.

• Borrowing to fund the early payment isn’t available to you at anything close to the published average rates.

• The discount is small over a long window, so the annualised figure sits near your actual cost of funds.

• The cash is already committed to something with a higher return than the discount.

Stretching payables also has costs that the yield calculation omits. ACCA notes that delaying payment “could lead a supplier to demand cash on delivery in future”, and PwC’s 2025/26 UK working capital study describes stretching terms as “a short-term fix that is not sustainable”.

Stretching payables also raises your days payable outstanding; our guide to days payable outstanding explains how it is calculated.

Approval timing

The rule only works if AP can act inside the window. If an invoice arrives by email and waits four days for a budget owner, joining a fortnightly payment run can mean missing a 10-day window without anyone deciding to miss it. A connected AP workflow closes that gap.

Spendesk is an all-in-one spend management platform consolidating company cards, expense management, accounts payable, procurement, and budgeting. Its accounts payable automation can capture the invoice on arrival and route it through configurable approval workflows. It also tracks payment status, so a discount-eligible invoice can be paid on day 9 by decision rather than on day 30 by default.

Frequently asked questions about early payment discounts

The answers below cover discount size and how invoice wording and VAT affect the calculation.

How big is a typical early payment discount?

Most discounts sit between about 1% and 3.5%: KPMG Netherlands’ May 2025 Supplier Payment Terms Index found that range among large Dutch companies, with windows of 8 to 30 days against an average full term of 60 days. A longer window on a longer term lowers the annualised yield, so run the formula on each supplier’s actual terms rather than assuming every discount behaves like 2/10 net 30.

Does VAT change whether the discount is worth taking?

The discount usually applies to the pre-VAT subtotal. Treatment varies by country and by how the supplier invoices, so confirm record-keeping with your VAT adviser.

Does the discount window run from the invoice date or from when we receive the invoice?

The window usually runs from the invoice date, which is how “2/10 net 30” is normally read. Some terms specify receipt of the invoice or receipt of the goods instead, so check the wording.

Book a Spendesk demo to see how your AP team can connect invoice capture with approval workflows, then track payments to pay inside the discount window by choice rather than by default.