What 1%/10 Net 30 means
1%/10 Net 30 is a standard trade‑credit term sellers put on invoices to encourage early payment. It says: take a 1% reduction in the invoice amount if you pay within 10 days; otherwise the full invoice is due within 30 days.
Plain-language breakdown of the parts
– 1% — the percentage discount available for early payment.
– 10 — the number of days during which the discount applies (the discount period).
– 30 — the final due date in days from the invoice date (the net period).
Why sellers use it
Offering a small discount for early payment speeds up cash collection. That is useful to vendors with working‑capital needs. Sellers with healthier margins are more likely to offer such discounts because they can afford to give a small price concession in exchange for faster cash.
Is it a loan?
Yes — functionally. If the buyer does not take the discount, they are effectively paying more and therefore “borrowing” the forgone savings over the remaining days to the net due date. The extra cost from not taking the discount can be expressed as an implied short‑term interest rate (often annualized for comparison).
Key accounting notes (how companies record it)
– Gross method: record the full invoice amount as accounts receivable or payable and record the discount only if/when the buyer actually pays within the discount period.
– Net method: assume the discount will be taken upfront and record receivables or payables net of the discount; if the discount is not taken, record the loss (discount forfeited) when payment is made late.
Jargon defined
– Invoice: the seller’s bill to the buyer detailing the amount owed.
– Discount period: number of days from invoice date during which the early‑payment discount can be claimed.
– Net period: total days until the invoice is due without discount.
– Cost of credit: the effective cost of borrowing when a buyer chooses not to take an early‑payment discount.
Worked numeric example
Invoice amount = $1,000 with terms 1%/10 Net 30.
– Early‑payment option: 1% of $1,000 = $10. Pay $1,000 − $10 = $990 if paid within 10 days.
– Full‑payment option: pay $1,000 any time up to day 30.
Implied cost of not taking the discount
Forgoing a 1% discount means paying $10 more for 20 extra days of credit (30 − 10 = 20 days). Expressed as an annualized rate, the implied interest is high — commonly shown around 18% (the standard calculation annualizes the forgone discount over the extra days).
Short checklist for buyers offered 1%/10 Net 30
– Confirm the discount applies to pre‑tax and pre‑shipping amounts as written on the invoice.
– Check cash availability: can you pay within the discount window without harming operations?
– Compare the implied annual cost of foregoing the discount to your alternative funding cost (e.g., line of credit rate).
– Decide on accounting method (gross vs net) with your bookkeeper or accountant.
– Note exact invoice date and calendar deadlines to avoid losing the discount or incurring late fees.
Special considerations
– For small discounts, the annualized cost of not taking them can be surprisingly large; buyers with access to cheap short‑term credit may still prefer the discount.
– Vendors may limit which charges the discount applies to, so verify whether taxes, freight, or other surcharges are included.
Sources
– Investopedia — 1%/10 Net 30 (explanation and example): https://www.investopedia.com/terms/1/1-10net30.asp
– Corporate Finance Institute — Trade Credit (overview of supplier credit and terms): https://corporatefinanceinstitute.com/resources/knowledge/finance/trade-credit/
– AccountingCoach — Purchase Discounts (gross vs net method explanation): https://www.accountingcoach.com/purchase-discounts/explanation
Educational disclaimer
This explanation is for educational purposes and does not constitute accounting or financial advice. Consult a qualified accountant or financial advisor for decisions that affect your business or tax filings.