Cost of Credit and Early Payments
In business, you may have been offered a discount for early payment of your supplier's invoice such as "2/10, net 30" meaning you'll pay 2% less if you pay within 10 days and the full amount is due within 30 days. Or, you may have been offered an early payment from a payment processor (such as paying a 1% fee for immediate deposit, or wait 2-3 days for processing).
Here's how to calculate how much effective interest you are paying (or losing) by not accepting that discount from the supplier or paying to that payment service company. (Below is a chart you can use to calculate your own rate).
Step-by-Step Calculation
What should I do with this information?
If a supplier offers you "2/10, net 30" or "1/10, net 30", the effective rates are 36.5% and 18.4%, respectively. You should regularly be trying to make these bill payments in time to earn the discount.
On the other hand, payment companies such as credit card companies and blockchain payment companies may offer you, say, three day earlier payment in return for a 1% fee. The effective interest rate is 122.9% - AWFUL!! If at all possible, try to remain patient. I understand that sometimes rent, payroll, loan payments and other non-negotiable payments on your part may require you to accept this 1% discount. If possible, talk with your customer about making payment in another manner such as e-Transfer which is immediate and usually has a very low fee or wire transfer (it's not as complicated as it sounds - let me know if you need assistance).
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Here's how to calculate how much effective interest you are paying (or losing) by not accepting that discount from the supplier or paying to that payment service company. (Below is a chart you can use to calculate your own rate).
Step-by-Step Calculation
- Interest for not taking the discount:
- The discount offered is 2% for paying 20 days earlier than the full term of 30 days.
- Calculate the daily interest rate:
- First, we find out what this discount translates to on a daily basis.
- Daily Interest Rate=Discount PercentageNumber of Days Early=2%20 days=0.1% per dayDaily Interest Rate=Number of Days EarlyDiscount Percentage=20 days2%=0.1% per day
- Annualize the daily interest rate:
- To find the annual interest rate, you multiply the daily rate by the number of days in a year.
- Annual Interest Rate=Daily Interest Rate×365 days=0.1%×365=36.5%Annual Interest Rate=Daily Interest Rate×365 days=0.1%×365=36.5%
What should I do with this information?
If a supplier offers you "2/10, net 30" or "1/10, net 30", the effective rates are 36.5% and 18.4%, respectively. You should regularly be trying to make these bill payments in time to earn the discount.
On the other hand, payment companies such as credit card companies and blockchain payment companies may offer you, say, three day earlier payment in return for a 1% fee. The effective interest rate is 122.9% - AWFUL!! If at all possible, try to remain patient. I understand that sometimes rent, payroll, loan payments and other non-negotiable payments on your part may require you to accept this 1% discount. If possible, talk with your customer about making payment in another manner such as e-Transfer which is immediate and usually has a very low fee or wire transfer (it's not as complicated as it sounds - let me know if you need assistance).
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