# 1%/10 Net 30
**Summary:** 1%/10 Net 30 is a common trade-credit term that offers a 1% discount for payment within 10 days; if the buyer does not take the discount, the full invoice is due in 30 days. The term is used by sellers to accelerate cash collection and by buyers to weigh the cost of forgoing the discount versus using short-term funds. This entry explains the mechanics, formula for the cost of credit, a worked example, practical checklist and pitfalls, comparisons to related terms, limits and misconceptions, and research notes with sources.
## Definition & Key Takeaways
## Why It Matters
## Formula & Variables
## Worked Example
## Practical Use
## Comparisons
## Limits & Misconceptions
## Research Notes
## Definition & Key Takeaways
– 1%/10 Net 30 is a trade-credit/payables term: a buyer receives a 1% discount if payment is made within 10 days; otherwise the full amount is due within 30 days.
– It functions as an incentive for early payment and as a short-term financing trade-off for buyers.
– Forgoing the discount can be expressed as an implied annualized interest rate (the cost of not taking the discount).
– Accounting treatments differ: gross method records full receivable then records discount when taken; net method records receivable net of the discount.
– Common in B2B supply chains and useful for cash management, yet it’s only attractive if the implied cost of credit exceeds alternative financing costs.
## Why It Matters
Trade-credit terms such as 1%/10 Net 30 affect working capital for both buyers and sellers. For sellers, offering a small early-payment discount can accelerate cash inflows, reduce collections effort and lower bad-debt risk. For buyers, choosing whether to take the discount requires comparing the value of the 1% saving against the opportunity cost of tying up cash or the explicit cost of borrowing.
In practice the apparent 1% is modest, but when annualized the cost of passing on the discount can be surprisingly high. Purchasers that routinely fail to take small discounts may be paying much more in effective interest than they realize. Conversely, sellers must ensure the discount is justified by the benefit of earlier funds and not an erosion of margin.
## Formula & Variables
Definitions and symbols
– D = discount rate (as a decimal). For 1% this is 0.01.
– d = discount days (days within which the discount applies). For 1%/10 Net 30, d = 10.
– N = net days (full payment due days). For this term, N = 30.
– P = invoice principal (currency units). Example: $1,000.
– t = days of credit forgone by taking the discount (N − d). For this term, t = 20 days.
Primary calculations
1. Discounted payment amount: P_discount = P × (1 − D).
2. Amount saved by taking the discount: Savings = P − P_discount = P × D.
3. Implied short-term cost (simple periodic rate) of not taking the discount for t days: r_period = D / (1 − D).
– For small D, r_period ≈ D.
4. Annualized effective cost (approximate, assuming simple annualization):
– r_annual ≈ r_period × (365 / t)
– More precise effective annual rate (EAR) can be calculated using compounding if desired, but for short trade terms the simple annualization is standard practice.
Units and scales
– D is unitless (decimal fraction) or presented as a percentage.
– Days are measured in calendar days unless otherwise specified.
– Annualization uses a 365-day convention unless an enterprise uses a 360-day year.
## Worked Example
Assume an invoice of $1,000 with terms 1%/10 Net 30.
Step 1 — Discount available:
– D = 0.01. Discount amount = $1,000 × 0.01 = $10.
– Discounted payment if paid within 10 days: $1,000 − $10 = $990.
Step 2 — Cost of not taking the discount for the buyer (period cost):
– If the buyer chooses to pay on day 30 instead of day 10, they forgo a $10 saving to have use of $990 for t = 20 days.
– Periodic cost r_period = D / (1 − D) = 0.01 / 0.99 ≈ 0.010101 → about 1.0101% for the 20-day period.
Step 3 — Annualize the cost (approximate):
– r_annual ≈ 0.010101 × (365 / 20) ≈ 0.010101 × 18.25 ≈ 0.184 → 18.4% per year.
– Interpretation: Forgoing the 1% discount to use the funds an extra 20 days equates roughly to paying an 18.4% annual interest rate.
Step 4 — Decision rule for a buyer:
– If the buyer’s marginal cost of short-term funds (opportunity cost, overdraft, credit line) is greater than ≈18.4% annual, take the discount.
– If the marginal cost is lower, it may make sense to pay on day 30 and use cheaper funds.
## Practical Use
Checklist for sellers (offerors of the term):
– Confirm the discount preserves margin after accelerating cash flow and reduced collection cost.
– Clearly state whether discounts apply before taxes, shipping, or other adjustments.
– Set automated reminders/invoicing to make it easy for buyers to take the discount.
– Monitor uptake and adjust terms if the discount is underused or causing undue margin loss.
Checklist for buyers (payers evaluating the term):
– Compute the implied annual cost of not taking the discount and compare to borrowing cost/opportunity cost.
– Consider cash flow timing and forecast: can the firm pay earlier without sacrificing higher-value opportunities?
– Automate payments for vendors where discounts are profitable to capture.
– Maintain communication: confirm invoice dates and any disputes before the discount window closes.
Common pitfalls
– Miscounting days (invoice date vs. receipt date): verify which date triggers the discount period.
– Ignoring the effect of taxes, freight, or allowances that may not be discountable.
– Assuming small discounts are immaterial — annualized rates are often much larger than they appear.
– Using the discount to fund negative working capital practices that harm supplier relationships.
## Comparisons
Related terms and when to prefer them
– n/30 or Net 30: No discount offered; full amount due in 30 days. Prefer if seller does not need accelerated cash or margins are too thin to offer a discount.
– 2%/10 Net 30: Higher early-payment discount; often more attractive to buyers and costlier for sellers. Use when seller needs faster cash and can absorb a larger discount.
– EOM (End of Month) or PO-based terms: Payment windows tied to month-end or purchase order dates rather than invoice date; useful when billing cycles differ.
When to prefer 1%/10 Net 30
– Sellers who want moderate cash acceleration without large margin erosion.
– Buyers with limited cash but high short-term borrowing costs; if marginal borrowing cost > implied annual cost of not taking discount, take it.
## Limits & Misconceptions
– “It’s only 1%, so it’s not worth worrying about”: Not true. Small discounts translate into high annualized costs when the discount window is short.
– The implied annual rate is not a formal loan interest rate from a bank; rather, it is an economic comparison of the value of immediate payment versus delayed payment.
– The annualized figure assumes the buyer could repeatedly use the short-term cash similarly across the year — this may overstate realistic benefits if cash needs fluctuate.
– Accounting treatment differences (gross vs. net method) do not change the economics; they only affect timing of reported revenue or expense.
## Research Notes
Sources and methodology
– Practical calculations in this entry follow standard trade-credit arithmetic as used in corporate finance and accounting texts: discount amount, period rate, and simple annualization (365-day convention).
– Market practices and prevalence of small cash discounts are documented in trade-credit surveys and industry reports; usage varies by sector and by firm size.
– For further reading and industry primers consult recognized finance and accounting resources that explain trade credit mechanics and accounting treatments.
Selected sources:
– Investopedia — What Does 1%/10 Net 30 Mean in a Bill’s Payment Terms? (explains mechanics and example)
– Corporate Finance Institute (CFI) — Trade Credit and Accounts Payable Terms (overview of trade-credit terms and calculations)
– AccountingTools — Purchase Discounts (accounting methods and journal entries)
Educational disclaimer: This entry provides general information on trade-credit terms for educational purposes and should not be taken as professional accounting or legal advice.
### FAQ
### See also
– Net 30
– 2%/10 Net 30
– Trade credit
– Purchase discounts
– Accounts payable