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Read the dates and discount
In the fictional terms 2/10 net 30, a qualifying payment on day 10 is 98% of face value, while the full invoice is due on day 30. The additional credit period in this comparison is twenty days, not thirty.
Use the early payment as the financing base
For an invoice of 1,000, the amounts are 980 early and 1,000 later. The extra 20 is a period financing cost relative to 980, giving 20/980 or approximately 2.0408% over the gap.
Label annualization as a convention
Simple annualization multiplies the period fraction by annual days divided by the gap. Effective annualization compounds that period factor under a repeated-period model. These are distinct reported rates rather than two interchangeable versions of an unlabelled annual cost.
Model the actual funding amount
If the discounted payment is fully borrowed, the amount financed is the discounted invoice, not automatically the full face value. Fees, funding availability, payment timing and the loan’s own conventions are needed for a real comparison.
Keep the exercise separate from an automatic recommendation
The example identifies mathematical costs under stated assumptions. It does not decide whether a company should use a facility, delay a payment or invest cash. Contractual and operational constraints can change that decision.