FIN.3:5.4 - An early-payment discount consumes real funding capacity

An invoice for 100 is payable on day 30, or 98 on day 10 under an agreed 2% discount. The company can draw exactly 98 net on day 10 under a separate available loan, with no fees and 1% interest for the 20-day period. It repays 98.98 on day 30. Relative to paying 100 then, using the loan to take the discount saves 1.02 at the same date. There are no other tax, supply or transaction differences in this illustration.

Forgoing the discount costs 2/98 = 2.0408% for 20 days. Using a 365-day effective annual convention gives approximately 44.59%; using simple annualization gives approximately 37.24%. Neither figure changes the actual 1.02 saving or supplies the loan. A fee greater than 1.02 at day 30 would reverse this comparison. A day-10 credit limit of only 90 would leave the early payment short unless another source supplied 8. The decision therefore needs both the price comparison and FIN.2’s dated feasibility result.