Early Payment Discount

Posted in Marketing and Strategy Terms, Total Reads: 1917

Definition: Early Payment Discount

Early Payment Discount is a type of credit policy in which a discount can be availed if the payment is made before a specified time. Early payment discount is chosen by a seller only if its accounts payable department sees that the cost of credit is higher than the cost of capital.

For example, a supplier of drilling machines offers the company 2/15 net 40 payment terms. This means the supplier will allow a 2% discount if paid within 15 days, or a regular payment in 40 days. The following calculation is used to determine the cost of credit related to these terms:

= 2% /(100%-2%) x (360/(40 – 15))

= 2 / (98) x (360/25)

= .0204 x 14.4

= 29.4% Cost of credit

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