Calculate the annualized cost of foregoing a cash discount (Trade Credit).
Example: For terms "2/10 net 30", enter Discount: 2%, Discount Period: 10 days, Full Period: 30 days.
360 Days (Commercial/Banker's)
365 Days (Exact)
Effective Annual Interest Rate (APR)
0.00%
function calculateEffectiveRate() {
// 1. Get input values
var discountRateInput = document.getElementById('discountRate').value;
var discountPeriodInput = document.getElementById('discountPeriod').value;
var netPeriodInput = document.getElementById('netPeriod').value;
var daysInYearInput = document.getElementById('daysInYear').value;
// 2. Parse values
var d = parseFloat(discountRateInput); // Discount %
var p = parseFloat(discountPeriodInput); // Discount Period
var n = parseFloat(netPeriodInput); // Net Period
var year = parseFloat(daysInYearInput); // 360 or 365
var errorDiv = document.getElementById('error-message');
var resultContainer = document.getElementById('result-container');
// 3. Clear previous errors and results
errorDiv.style.display = 'none';
resultContainer.style.display = 'none';
// 4. Validate inputs
if (isNaN(d) || isNaN(p) || isNaN(n) || isNaN(year)) {
errorDiv.innerText = "Please fill in all fields with valid numbers.";
errorDiv.style.display = 'block';
return;
}
if (d < 0 || p < 0 || n < 0) {
errorDiv.innerText = "Values cannot be negative.";
errorDiv.style.display = 'block';
return;
}
if (n = 100) {
errorDiv.innerText = "Discount rate must be less than 100%.";
errorDiv.style.display = 'block';
return;
}
// 5. Calculation Logic
// Formula: (Discount% / (100% – Discount%)) * (DaysInYear / (NetDays – DiscountDays))
var decimalRate = d / 100;
var ratePart = decimalRate / (1 – decimalRate);
var daysForegone = n – p;
var timePart = year / daysForegone;
var effectiveRateDecimal = ratePart * timePart;
var effectiveRatePercent = effectiveRateDecimal * 100;
// 6. Display Results
document.getElementById('effective-rate-result').innerText = effectiveRatePercent.toFixed(2) + "%";
var explanation = "By not taking the " + d + "% discount and paying " + daysForegone + " days later instead, you are effectively borrowing money at an annual rate of " + effectiveRatePercent.toFixed(2) + "%.";
document.getElementById('result-explanation').innerHTML = explanation;
resultContainer.style.display = 'block';
}
Understanding the Effective Discount Rate
The Effective Discount Rate represents the real, annualized interest rate cost of not taking a cash discount offered by a supplier. In business-to-business transactions, suppliers often offer trade credit terms such as "2/10 net 30". This means the buyer can take a 2% discount if payment is made within 10 days; otherwise, the full amount is due in 30 days.
While 2% might seem like a small number, foregoing this discount is equivalent to borrowing money at a high interest rate. This calculator helps financial managers and business owners decide whether it is more cost-effective to borrow money from a bank to pay early (taking the discount) or to delay payment until the net date.
How to Calculate Effective Annual Rate
The formula to determine the annualized cost of trade credit depends on the discount percentage and the number of days payment is delayed beyond the discount period.
Effective Rate = (D / (100 – D)) × (Y / (N – P))
Where:
D = Discount Percentage (e.g., 2)
Y = Days in the Year (usually 360 for commercial finance, or 365)
N = Net Payment Period (Total days allowed before payment is overdue)
P = Discount Period (Number of days available to take the discount)
Example Calculation: 2/10 Net 30
Let's look at the common term "2/10 net 30".
Discount (D): 2%
Net Days (N): 30 days
Discount Period (P): 10 days
Days Borrowed (N – P): 20 days
If you do not take the discount, you keep your money for an extra 20 days. However, you pay 2% more for that privilege.
Using the formula: (2 / 98) × (360 / 20) ≈ 0.0204 × 18 ≈ 0.367 or 36.7%.
This means foregoing the discount is mathematically equivalent to borrowing money at an annual interest rate of roughly 36.7%. If your business can borrow from a line of credit at 8% or 10%, it makes strong financial sense to borrow the money to pay early and secure the discount.
Why This Metric Matters
Cash Flow Management: Understanding the effective rate helps in prioritizing payments. You should always prioritize taking discounts that have a higher effective rate than your cost of capital.
Vendor Negotiations: If the effective rate is extremely high, it indicates the supplier is desperate for early payment. If it is low, the supplier is offering standard credit terms.
Cost Savings: For a company with $1,000,000 in annual purchases, consistently taking a 2% discount adds $20,000 directly to the bottom line, which can be significantly more valuable when annualized.