Here is a simple online trade credit cost calculator that can be used to calculate the cost of a business or company trade credit based on payment days, discount days, and discount rate (%). Trade credit is credit that a trader gives to a trader or other customer for the purchase of goods and services. With this trade credit cost calculator, you can calculate loan costs based on payment days, commercial loan discounts and discount days.
There is a simple online cost credit calculator for you to calculate the trade credit cost of a company. Small businesses typically use trade credit or Accounts payable AP as a source of finance. Trade credits are the amounts that companies must pay their suppliers for the supplies, products and other goods needed to run their business. Trade credit can often be the biggest operating liability on a small business’s balance sheet.
Some people use credit to pay for everything from everyday purchases like groceries and groceries to big purchases like holidays and big tickets. Regardless of which credit you buy, it’s important to be responsible so that you don’t run into credit problems such as missed payments, overspending, or high loan usage (to learn how to calculate your cost of credit usage rate). , use the calculator). Good credit management skills and knowledge are essential to maintaining a positive credit report and rating. This can affect your ability to buy or rent a house and find a job that you qualify for.
General definition of Cost of credit calculator
The cost of a credit formula is a calculation used to get a discounted price for the initial payment. This formula is useful in determining whether to offer or accept a discount. The formula can be obtained from two points of view:
- The accounts payable AP department uses this to check if it is cost effective to apply for an early payment discount. This occurs when the loan price assumed by the discount is higher than the seller’s capital cost.
- Seller sales department and buyer’s purchasing department. Both parties consider the prepayment discount to be the subject of negotiation in the context of a sales transaction.
In fact, the initial payment terms only apply if the buyer has enough cash to make an early payment and the cost of credit is high. The availability of cash may be the determining factor, not the loan price. For example, if the buyer’s money is tied to a long-term investment, they may not be able to get a discount for an early payment. This is done even though the inherent borrowing costs are usually quite attractive to the buyer.
To find out your cost of credit for a payment do the following cost of credit calculator:
Determine the percentage of 360 days of the year for the applicable discount period
The discount period is the period between the last day the discount conditions still apply and the usual invoice due date. For example, if the discount is collected within 10 days and the normal payment is due in 30 days, the discount period is 20 days. In this case, divide the discount period by 20 days by 360 days a year to get an 18-fold multiplier.
Subtract the discount rate from 100%
For example, if you are offered a 2% discount, the result will be 98%. Then divide the discount rate 100% smaller than the discount rate. To continue with the example, this would be 2% / 98% or 0.0204.
Multiply the results from the previous steps to get the annual loan cost
To complete the example, let’s multiply 0.0204 by 18 to get a 36.7% credit on the condition that it allows a 2% discount if paid in 10 days or a full payment in 30 days.
If the credit price is higher than the increase in the cost of working capital, take the discount.
The formula is as follows
Discount %/(100-Discount %) x (360/Allowed payment days – Discount days)
For example, the company A offers 2/15 net 40 payout terms. To translate a short description of a payment term, it means the provider provides a 2% discount if paid within 15 days, or a regular payment within 40 days. Company A administrators use the following calculations to calculate the borrowing costs associated with these terms:
2% / (100% -2%) x (360 / (40-15))
2% / (98%) x (360/25)
0.0204 x 14.4
Credit of cost = 29.4%
The cost of credit associated with this requirement is quite attractive, so the collector pays the supplier invoice with the discount requirement for prepayment.
Now let us see!
What is the cost of trade credit?
Trade credit is an important source of liquidity and funding for any business. Companies need to manage their debt effectively and take advantage of the payment period to minimize funding costs.
A Cost of trade credit is an agreement between two companies whereby a customer can make purchases on the account without making a cash advance payment. The parties agree on the condition that the customer makes payment to the supplier at a later time, usually within 30, 60 or 90 days. The transaction is recorded on an invoice.
A trade credit is a free credit in the sense that no additional payment is required if the payment is made within the repayment period. The important decision here is whether it is profitable for the company to pay within the discount period or only until the end of the payment period.
Free trade credits are for companies that made payments within the discount period. Cost trade credits refer to companies that pay after the end of the discount period, which incur significant financial costs. If a business fails to make a payment within the full payment period, they may incur additional fees and late payment fees. In these circumstances, trade credit is a very expensive form of financing.
How trade credit works
Often, when a reliable company buys from a supplier, the supplier allows the company to delay payment. When providers allow late payments, they are effectively giving funds to companies they trust, and the credit becomes a source of working capital that the company can use. For small businesses and startups, trade credit may be the only available financing for the business. In this way, suppliers know how to monitor their AR and the companies they have credit with.
Cost of Trade Credit formula
The calculator uses a trade credit cost formula based on 365 day years (see below):
Cost of Trade Credit = [1+ (Discount % / (1 – Discount %))] [365 / (Payment Days – Discount Days)] – 1
Terms of trade formula
D: Percentage of initial payment discount
Normal Days : Normal credit terms are offered
Discount days: days when the discount can be given
This formula is based on the Annual Percentage Rate (EAR) formula which calculates the interest rate for one year based on the nominal interest rate which is calculated several times a year.
Using a Cost of Trade Credit Calculator
The Cost of Trade Credit Calculator is used as follows:
Enter a typical day
Normal days are the normal credit terms for invoice payments. For example, if the condition is 2/10 net 30, normal days are entered as 30.
Enter a discount day
Trade Discount days are the number of days payment must be made to receive the prepayment trade discount calculator. For example, if the requirement is 2/10 net 30, the discount day is entered as 10.
Enter the early payment discount
Early payment discount is a discount offered for prepayment of invoices. For example, if the condition is 2/10 net 30, a 2% prepayment discount will apply. The trade loan cost calculator calculates the annual trade loan fee based on 365 days of the year.
Cost of trade credit calculator with example
Below is the formula for calculating the price of a business loan. You can also use this formula to calculate costs if you don’t get a trade discount calculator. For example, suppose your company is offered 2/10 of the terms of trade, 30 net, but a 2% discount cannot be granted. In other words, you don’t have the cash flow to pay the bills and receive a discount in 10 days. How much does it cost?
Here’s the cost calculation formula if you don’t get a discount:
Discount Rate ÷ (1-% Discount) x [360 / (Fully Allowed Payment Days – Discount Days)]
Here’s a step-by-step explanation of the formula using the example above: 2/10 net 30.
- Divide the 2% discount rate by (100% – 2%), the difference of 100% minus the 2% discount rate. Equal to 2.0408%.
- Divide the 360 nominal days per year by the number of full payment days allowed (30 days) minus the allowable discount days (10 days). This is equal to 18.
- Multiply the result by 2.0408% by 18. That’s 36.73%, the real annual interest rate.
According to the conditions in our example above, if you don’t receive a discount, 36.73% is the cost. You can get a credit union or bank loan at a lower interest rate.
Net 30 definition
2/10 net 30, defined as a trade credit under which customers can choose to receive a 2 percent discount to be paid to sellers within 10 days or the full amount (net) of their maturity within 30 days of paying the invoice. very common in business-to-business sales. Wherever sellers offer credit terms, they are likely to offer discounts to encourage early payment.
The term 2/10 net 30 means that the supplier or seller gives the buyer an additional 2% discount if the buyer pays the amount due within 10 days of the purchase date of the goods, rather than the full 30 day credit period. to claim something. For example, if someone purchases $ 100 worth of goods at a store, they only need to pay $ 98 if they are paid within 10 days of purchase. Otherwise, $ 100 will be paid out in a total of 30 days.
In other words, it usually appears that the supplier is giving the buyer credit time to pay the installments. To return this installment early, this scheme emerged and the supplier offered the buyer an additional 2% discount for early repayment.
How do you calculate 2/10 net 30 calculators?
- Step 1: Calculate the total amount of claims for which we want to calculate the amount of down payment to be paid.
- Step 2: Calculate the amount of discount that will be given using the following formula if the buyer pays within 10 days: Discount = total claim amount * discount percentage, i.e. 2%
- Step 3: Finally, follow the formula for 2/10 net 30:
Amount to be received for payment within 10 days = total claim amount calculated in step 1 above – discount amount to be awarded was calculated in step 2 above. Mathematically represented as:
Net 2/10 30 = total claim – total discount
Company B has sold $ 1,500,000 in materials, $ 532,500 in other items, and some other amounts of $ 1,117,500 are also payable to RST Inc. on 2, 30 October 2020 net. . Now Company B wants to know the difference in the number of claims in the two situations; i.e. Made a payment option within 10 days and did not use the discounted initial payment option.
The calculations for the two cases are as follows:
Step 1: Calculate the total claim amount, i.e.
Material cost: $ 1,500,000
Other items: $ 532,500
Other receivables: $ 1,117,500
Total AR = $ 1,500,000 + $ 532,500 + $ 1,117,500 = $ 3,150,000
Step 2: Calculate the discount amount if the payment is made by the buyer within 10 days:
Discount = 3,150,000 * 2 = 63,000.
Step 3: Amount of receipt for payment in 10 days:
Total claim – total discount
3,150,000 – 63,000
The trade credit is the amount spent to obtain a trade credit to a customer. Trade credit is essential for business growth as well as customer satisfaction. However, every organization must ensure that their trade credit does not exceed the limit.
Does your company need to use trade credit to purchase supplies and materials or other sources of finance? If your company has free cash flow to take advantage of the discounts offered on loan terms, then yes. However, you need to calculate the cost of trade credit or the cost of not taking rebates as described in the sections above.
If you don’t have the cash flow to get a discount, you’re usually going with a cheaper form of financing. To receive a discount it is better to have sufficient cash flow in the company.