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Financial Management and Business Data Analytics · Payable Management

Trade Credit and Credit Terms: 2/10 Net 30 Explained

Updated 10 October 2026 · Fact-checked

Trade credit is a supplier allowing you to buy now and pay later. Terms like 2/10 net 30 mean a 2% discount if you pay within 10 days, otherwise the full amount is due on day 30. To solve, compute the cost of not taking the discount: (D ÷ (100 − D)) × (365 ÷ days gained), and compare it with your borrowing rate.

Understand Trade Credit and Credit Terms

Trade credit is credit given by a supplier when you buy goods or services and pay later. It is a spontaneous source of short-term finance. It appears in your books as sundry creditors or bills payable. No loan paperwork is needed, and it grows as your purchases grow.

Credit terms set out when and how you must pay. The term 2/10 net 30 has three parts. The 2 is the cash discount percentage. The 10 is the discount period in days. The 30 is the net period, the last day for paying the full invoice amount. So on an invoice of ₹1,00,000, you pay ₹98,000 if you pay by day 10. If you miss that, you pay ₹1,00,000 by day 30.

Trade credit looks free, but it is not always free. It has no explicit cost if no discount is offered and you pay within the net period, or if you take the discount and pay within the discount period. If a discount is offered and you skip it, you are in effect borrowing from the supplier. The amount you borrow is the discounted price. The extra you pay for waiting is the discount you gave up. That extra, spread over the extra days you get, is the cost of trade credit. It is often very high, well above bank interest.

The decision rule is simple. If the cost of not taking the discount is higher than your cost of short-term borrowing, take the discount, borrowing from the bank if you must. If it is lower, skip the discount and pay on the last day. If no discount is offered, the credit is free as long as you pay within the net period. Paying late may cost you penalty interest, a damaged relationship or a worse credit rating.

Benefits of trade credit: easy and informal, no security needed, flexible, grows with sales, and gives time to sell goods before paying. Drawbacks: the hidden cost of forgone discounts, risk of losing supplier goodwill if you stretch payments, possible higher prices from suppliers who offer long credit, and a weaker credit standing if you delay.

Key rules to remember

Cost of not taking the cash discount (simple)
Cost = [D ÷ (100 − D)] × [365 ÷ (Credit period − Discount period)] × 100
D is the discount in % of invoice price. Credit period is the net period in days. Some questions use 360 days; follow the question.
Effective (compound) annual cost
Effective cost = [1 + D ÷ (100 − D)]^(365 ÷ N) − 1
N is credit period minus discount period. Use this when the question asks for the effective or compounded rate.
Amount payable if discount is taken
Payment = Invoice price × (1 − D ÷ 100)
This is the true amount borrowed if you do not take the discount.
Decision rule
Take the discount if cost of forgoing > cost of alternative short-term finance
If equal, you are indifferent. If lower, pay on the last day of the net period.

How to solve Trade Credit and Credit Terms questions

Use this order for any question on trade credit terms or cash discount.

  1. 1Read the terms and write them as discount %, discount days and net days. For 2/10 net 30: D = 2, discount days = 10, net days = 30.
  2. 2Find N, the extra days gained by not taking the discount: net days minus discount days. Here N = 20.
  3. 3Compute D ÷ (100 − D). This is the cost for the extra period. For 2%: 2 ÷ 98.
  4. 4Annualise it by multiplying by 365 ÷ N (or 360 ÷ N if stated). Use the compound form if the question asks for the effective rate.
  5. 5Compare with the cost of bank borrowing or the return on surplus funds given in the question.
  6. 6State the decision in a sentence: take the discount or forgo it, and say why.
  7. 7If asked for rupee savings, compute the discount saved less the interest on the funds used for the shorter period, and check it agrees with your decision.

Quickest way: Fast 3-line cost check

When to use it: Use for MCQs and for the first part of a long answer when only the simple annual cost is needed.

  1. Write D ÷ (100 − D) as a fraction, for example 2 ÷ 98.
  2. Multiply by 365 ÷ N, for example 365 ÷ 20.
  3. Convert to a percentage and compare with the given borrowing rate. Stop there unless compounding is asked.

Common mistakes in Trade Credit and Credit Terms

  • Dividing the discount by the invoice price instead of by the discounted price (using D ÷ 100).

    The discount looks like a percentage of the invoice, so students stop at 2%.

    Fix: The amount you actually owe if you pay early is 100 − D. Always use D ÷ (100 − D).

  • Using the full net period (30 days) instead of the extra days (20 days) for annualising.

    Students read 30 as the credit period and forget the discount period.

    Fix: Subtract the discount period from the net period. Use N = net days − discount days.

  • Mixing 360 and 365 days or ignoring the question's instruction.

    Students memorise one version of the formula.

    Fix: Check the question. If it says 360 days, use 360. If silent, state your assumption and use 365.

  • Taking the wrong decision when comparing rates.

    Students think a higher cost of forgoing the discount is a reason to keep using the supplier's credit.

    Fix: The cost of forgoing the discount is the cost of using the supplier's credit. If it exceeds your borrowing rate, pay early to take the discount and borrow from the bank. If it is lower, use the credit and pay on the last day.

  • Giving the simple rate when the effective rate is asked, or the reverse.

    Both versions are in the syllabus and the wording is missed.

    Fix: Look for words like effective, compounded or annualised. If absent, give the simple rate and mention the effective rate if time allows.

Worked examples

Example 1

Sharma Traders buys goods worth ₹5,00,000 on terms 2/10 net 30. Calculate the annual cost of not taking the cash discount (365 days, simple method). If the firm can borrow from its bank at 18% per annum, should it take the discount?

Show the solution
  1. Discount = 2% of ₹5,00,000 = ₹10,000. Payment on day 10 = ₹4,90,000.
  2. Extra days gained N = 30 − 10 = 20.
  3. Cost for the period = 2 ÷ 98 = 0.020408.
  4. Annual cost = 0.020408 × (365 ÷ 20) = 0.020408 × 18.25 = 0.37245, which is about 37.24%.
  5. Compare: 37.24% is higher than the bank rate of 18%.
  6. So borrowing from the bank to pay early is cheaper than using the supplier's credit.

Answer: The cost of not taking the discount is about 37.24% per annum. It exceeds the 18% bank rate, so Sharma Traders should take the discount and pay on day 10, borrowing from the bank if needed.

Example 2

Verma Ltd receives an invoice of ₹2,00,000 on terms 1/15 net 45. Its short-term borrowing rate is 12% per annum. Compute the cost of forgoing the discount (360 days, simple method) and the net saving in rupees if it takes the discount by borrowing the amount for the extra period.

Show the solution
  1. Discount = 1% of ₹2,00,000 = ₹2,000. Payment on day 15 = ₹1,98,000.
  2. N = 45 − 15 = 30 days.
  3. Cost = (1 ÷ 99) × (360 ÷ 30) = 0.010101 × 12 = 0.12121, which is about 12.12%.
  4. Interest on ₹1,98,000 for 30 days at 12% = 1,98,000 × 0.12 × 30 ÷ 360 = ₹1,980.
  5. Net saving = ₹2,000 − ₹1,980 = ₹20.
  6. The saving is very small because 12.12% is only slightly above 12%.

Answer: The cost of forgoing the discount is about 12.12% per annum. Taking the discount with bank finance gives a net saving of ₹20, so it is only marginally better to take the discount.

Exam tips

  • In MCQs, spot the terms first. Many questions give 2/10 net 30 and ask for the cost. Remember that the answer for this common term is about 37.24% with 365 days, or 36.73% with 360 days.
  • Always show the formula, the value of N and the comparison with the borrowing rate. Step marks are given for each, even if the final figure slips.
  • State your assumption on 360 or 365 days in one line when the question does not say.
  • End with a clear decision sentence. Examiners reward a stated recommendation with a reason.
  • For theory questions, give a balanced list of advantages and disadvantages with the hidden cost of forgone discount as a key point.

Practice questions from Payable Management

Trade Credit and Credit Terms in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Trade Credit and Credit Terms: frequently asked questions

What does 2/10 net 30 mean?

It means you get a 2% discount if you pay within 10 days of the invoice. If you do not, the full amount is due within 30 days. The 30 days is the net period.

How do I calculate the cost of not taking a cash discount?

Use [D ÷ (100 − D)] × [365 ÷ (net days − discount days)]. For 2/10 net 30 this is 2 ÷ 98 × 365 ÷ 20, which is about 37.24%. Use 360 days if the question says so.

Is trade credit always a free source of finance?

No. It has no explicit cost if no discount is offered and you pay within the net period, or if you take the discount and pay within the discount period. If you forgo a discount, the implied cost is often much higher than bank interest.

What are the main advantages and disadvantages of trade credit?

Advantages are easy availability, no security, flexibility and growth with purchases. Disadvantages are the hidden cost of forgone discounts, possible damage to supplier relations and a weaker credit rating if you pay late.