It is quite common for businesses to offer discounts to their customers. Discounts can be offered in terms of trade (cash) discount and payment term discount. Nowadays running business without extending credit is almost impossible. However to attract early payments from customers and to avoid risk of non payments by customers, suppliers offer credit period with early payment discount option.

In order to avail discount, buyers make payment within the time specified for payment. However this discount option is not available for an unlimited period of time. This kind of facility is available across all industries. It benefits both the supplier and the customer.Credit period generally indicates the period within which buyer can make payment for goods procured or services obtained. This period is generally denominated in days like 30 days, 45 days, 60 days or 90 days. To attract fast payments from customers, this period is generally split into two or three parts.

Let Us Take An Example To Understand This Process :

You have issued a purchase order to your vendor ABC for supply of raw material. Payment terms have been agreed at 2/10 Net 30. Further it has been specified that this term would start from the invoice date. This term contains discount at the rate of 2% in case payment is made within 10 days from the invoice date. However no discount is available if payment is made after the 10th day. Here 2% discount acts as a motivating factor encouraging you to make an early payment.

Suppose invoice value was $ 50000, by making payment within 10 days, you have saved $ 1000. If you are not interested in availing the discount and want to keep the money with yourself for as long as possible, you can use credit period of 30. It is important to note that this 30 period will be calculated from the invoice date itself and not after expiry of 10 days (discount period).

There is no fixed basis for extending payment term. Different businesses may do a cost benefit analysis before offering discount on early payments. They can offer different discount rates, different discount period and maximum payment period. For Instance, a company may offer payment term as 1/15 Net 45. Here discount percentage is 1%, period within which discount can be availed is 15 days and maximum period available for payment is 45 days.

An important part of this kind of payment term is the basis (mainly in the form of any specific date) on which period for discount is calculated. Payment term calculations may start from the date goods are received, from the invoice date, from good dispatch date and so on. For Instance, a supplier offers a payment term of 2/10 Net 30 from the date of dispatch of goods. Let us assume that goods are dispatched on 1st November 2010, invoice date is 9th November 2010 and goods received date is 7th November 2010. In this case, credit period calculations will be performed using 1st November 2010, that is, the goods dispatched date.

If first part, that is, discount percentage/discount period (2/10 or 1/15 and so on) is not mentioned, it simply indicates that no discount is available on this particular purchase.

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