December 20, 2010

Trade Credit (2/10 net 30)?

By Planet Wealth

I’m reading a paper that says the following: If the Trade Credit is repaid within 10 days its a excellent deal. IF its not repaid within 10 days the implicit annual interest rate for such borrowings is nearly 45%. The company has effectively chosen to pay 2 percent for 20 days. So here are my questions: If the company pays within 10 days what is their interest rate? Is it 2% or just 2% cheaper than the specified rate? What exactly is the deal with that 45%? If the companys repays the loan 10 days after the initial 10 days do they just have to pay 20%?

Here is the link to the paper: http://www.phil.frb.org/files/br/brq303mb.pdf

The part im confused about is on page 3 paragraph 3

Topics: Uncategorized | 3 Comments »

3 Responses to “Trade Credit (2/10 net 30)?”

  1. Ted Says:
    December 20th, 2010 at 7:57 pm

    In most all situations, it means that the seller gives the buyer a discount of 2% of the invoice if paid within 10 days, but the entire invoice for full payment is 30 days.

  2. Harley N Says:
    December 20th, 2010 at 7:57 pm

    Where the 45% interest rate comes in is here:

    You get a 2% discount for paying 20 days early (within 10 instead of within 30). on 100 dollars, this is a savings of 2 dollars. So to take an extra 20 days to pay would cost you 2 dollars. If you look at this like interest you are losing 2 dollars for taking 20 days to pay 100 dollars which is a lot of money over a years time.

  3. ML Says:
    December 20th, 2010 at 7:57 pm

    2/10 Net 30

    Take 2% off the total bill if paid in 10 days.
    Full Bill due in 30 days no break
    After 30 they apply the interest rate.

Comments

« | Home | »