10 20 Net
10 20 Net
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Trade Credit (2/10 net 30)?
I'm reading a paper that says the following: If the Trade Credit is repaid within 10 days its a good 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
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.