1%/10 Net 30: Meaning and How It Works

What it means

“1%/10 net 30” is a common invoice payment term that offers a 1% discount if the buyer pays within 10 days; otherwise the full invoice amount is due within 30 days. It’s a seller incentive to accelerate cash inflows and a short-term credit decision for the buyer.

How it works

• First number (1%) = percentage discount available for early payment.
• Second number (10) = number of days the discount is available (discount period).
• Third number (30) = final due date for the invoice (net days).

Example: A $1,000 invoice with 1%/10 net 30 can be paid as $990 if paid within 10 days, or $1,000 if paid by day 30.

Economic implication — a short-term loan

If a buyer forgoes the 1% discount and pays on day 30, the buyer is effectively paying more for a 20-day extension of credit. Annualizing that cost shows the implied interest rate of not taking the discount:
* Annualized cost ≈ (discount ÷ (1 − discount)) × (365 ÷ (net days − discount days)).
* For 1%/10 net 30: (0.01 / 0.99) × (365 / 20) ≈ 18.4% per year.

Thus, declining the discount is equivalent to borrowing at roughly an 18% annual rate for that short period.

Accounting treatment

Two common methods record cash discounts:
* Gross method — assumes the discount will not be taken. Record receivable at full amount; if payment is made within the discount period, record a discount when payment is received.
* Net method — assumes the discount will be taken. Record the receivable net of the discount; if the discount is not taken, recognize the lost discount as interest expense.

When to take the discount

Consider taking the discount if:
* Your alternative cost of funds (borrowing rate or opportunity cost) is higher than the implied annualized discount rate (~18% for 1%/10 net 30).
* You have sufficient cash flow and limited access to cheaper short-term credit.

Skip the discount if:
* You can invest or use the cash at a return higher than the implied cost, or you have cheaper external financing.

Special considerations

• Vendors with higher margins are more likely to offer cash discounts.
• For cash-strapped buyers or those without credit lines, early-payment discounts can be valuable.
• If the invoice isn’t paid within the discount period, the price reduction is forfeited and full payment is required by the net due date; late fees may apply after that date.

Key takeaways

• 1%/10 net 30 gives a 1% discount for payment within 10 days; otherwise full payment is due in 30 days.
• Forgoing the discount is equivalent to a short-term loan with a high effective annual rate (about 18% for 1%/10 net 30).
• Decide to take the discount by comparing the implied cost of not taking it to your alternative cost or return on funds.