Payment terms 1/10 net 30 refer to a discount offered to customers when they pay their bill early.
A company offers early payment discounts to encourage customers to pay their bills early. Businesses need cash to survive, and the sooner a company can collect its receivables, the better it can meet its short-term obligations. The term 1/10 net 30 means that a company receives a 1% discount on payments made within 10 days, and then any remaining balance is due within the original 30 day window. A popular alternative are the payment terms 2/10 net 30, which provides a larger 2% discount for paying early.
Collecting receivables early helps improve many financial ratios and metrics for the company. It lowers the Days of Sales Outstanding (DSO), and improves metrics like the Accounts Receivable Turnover and other liquidity ratios.
Example Fact Pattern for 1/10 Discount
On August 1, 2023, Company A sold $100,000 of product to Company B. The invoice is dated August 1, 2023, and payment is due on or before August 31, 2023. It includes the provision for 1/10 net 30.
Company B could wait until August 31, 2023, to submit a $100,000 payment to satisfy the invoice. However, Company B could submit a payment within ten days to receive a discount, with any remaining balance due within the 30-day window.
Company B decided to submit a cash payment of $60,000 to Company A on August 5, 2023. By submitting the payment within the 10-day window, it receives a 1% discount on the overall invoice, which is $600 (1% times $60,000). The invoice amount due is now $99,400 ($100,000 – $600).
Company B paid the first $60,000, so the remaining balance due by August 31, 2023, is $39,400 ($99,400 – $60,000). By taking advantage of the 1/10 net 30 terms in this fashion, the customer saved $600 on their total invoiced amount.