Cost of 30-Day Credit Terms: What Selling on Credit Costs

Giving a customer 30 days to pay is not free: you are lending them the invoice value for a month, and that money has a cost. At a 12% cash credit rate, 30 days of credit costs about ₹986 for every ₹1 lakh of sales in interest alone, before bad debts and follow-up effort. On the other side, a supplier's "2% discount if you pay in 10 days, otherwise 30" is worth about 37% a year, so skipping it is usually expensive. Here is how to work out both, with the MSME rules that limit how long you can take.

Why credit terms have a cost

When you deliver goods today and get paid in 30 days, three things happen:

1. Your money is tied up. You have already paid for the goods, staff and rent. Until the customer pays, that gap is funded by your capital or your overdraft.
2. You take credit risk. Some customers will pay late and a few will never pay.
3. You spend effort collecting. Reminders, calls, reconciliations and sometimes legal notices.

The interest part is easy to measure:

Cost of credit = Invoice value × Annual cost of funds × Credit days ÷ 365

Your "cost of funds" is the rate on your cash credit or overdraft if you use one, or the return you could earn on spare cash if you do not.

Worked example: a wholesaler selling on 30 days

The figures are illustrative. A Jaipur wholesaler of stationery sells ₹60 lakh a year, all on 30-day credit. It has a 20% gross margin and funds its receivables through a cash credit limit at 12% a year.

Step 1 — interest cost. ₹60,00,000 × 12% × 30 ÷ 365 = ₹59,178.08 a year.

Step 2 — bad debts. Experience suggests 0.5% of credit sales are never recovered: ₹60,00,000 × 0.5% = ₹30,000.

Step 3 — total cost of credit. ₹59,178.08 + ₹30,000 = ₹89,178.08 a year, or 1.49% of sales.

Step 4 — compare with gross profit. Gross profit is ₹60,00,000 × 20% = ₹12,00,000. Credit terms eat ₹89,178.08 ÷ ₹12,00,000 = 7.43% of gross profit.

If the wholesaler drifts into 60-day terms, the interest alone doubles to ₹60,00,000 × 12% × 60 ÷ 365 = ₹1,18,356.16, and bad-debt risk usually rises too, because older dues are harder to collect.

The practical lesson: if a customer demands 60 days, the price should reflect it, or the extra cost comes straight out of your margin. For how this interacts with stock and supplier days, see the cash conversion cycle.

The true cost of an early-payment discount

Suppliers often offer a cash discount for prompt payment, written as "2/10 net 30". The annualised cost of not taking it is:

Annual rate = Discount ÷ (1 − Discount) × 365 ÷ (Full credit days − Discount days)

For 2/10 net 30: 0.02 ÷ 0.98 × 365 ÷ 20 = 0.020408 × 18.25 = 37.24% a year (simple). If you compound it, as if you could repeat the trade all year, it is about 44.6%.

Should a buyer take the discount?

Say the same wholesaler buys ₹4,00,000 of stock on 2/10 net 30 terms.

• Discount for paying on day 10: ₹4,00,000 × 2% = ₹8,000
• Payment on day 10: ₹3,92,000
• If that is funded from the overdraft at 13% for the extra 20 days: ₹3,92,000 × 13% × 20 ÷ 365 = ₹2,792.33
• Net gain from taking the discount: ₹8,000 − ₹2,792.33 = ₹5,207.67

As long as your borrowing rate is below the annualised discount rate, take the discount. Even expensive invoice finance at 16–17% a year beats paying 37%; see invoice discounting vs factoring.

Should a seller offer the discount?

From the seller's side, a 2/10 net 30 offer means paying 37% a year to get money 20 days earlier, when the overdraft may cost 12%. That is rarely worth it unless:

• the customer is a slow or risky payer and the discount genuinely changes behaviour, or
• you are at your overdraft limit and cash today prevents a missed salary or GST payment.

A smaller, better-targeted discount (for example 0.5% for payment within 7 days) usually costs less. Compare any discount with the effective annual cost of borrowing using the method in loan APR and total borrowing cost.

The MSME rules on payment terms

If either side of the trade is a micro or small enterprise (MSE), the law limits how long credit can run. These rules are as of October 2026.

MSMED Act, 2006

• Section 15: a buyer must pay an MSE supplier on or before the agreed date, and the agreed period cannot exceed 45 days from the day the goods or services are accepted. Where there is no written agreement, payment is due within 15 days.
• Section 16: if the buyer pays late, it owes compound interest with monthly rests at three times the RBI Bank Rate. The Bank Rate moved to 5.75% after the RBI's 7 October 2026 policy, so the penal rate works out to about 17.25% a year while that Bank Rate holds.
• Section 23: that interest is not deductible when computing the buyer's income.
• MSE suppliers can file delayed-payment cases on the MSME Samadhaan portal. Parliament passed an MSMED (Amendment) Bill in August 2026 that tightens timelines for dispute resolution; check the Ministry of MSME's notifications for which provisions are in force.

Income-tax: old Section 43B(h), now Section 37(2)(g)

From FY 2023-24, old Section 43B(h) of the Income-tax Act, 1961 allowed a deduction for amounts owed to MSE suppliers beyond the MSMED Act time limit only in the year of actual payment. The Income-tax Act, 2025, in force from 1 April 2026, carries the same rule in Section 37(2)(g), as the Finance Ministry confirmed in a Rajya Sabha reply in July 2026.

Illustrative effect: a buyer that owes a micro supplier ₹4,00,000 at 31 March, more than 45 days past acceptance, loses the deduction for that year. At an illustrative 31.2% tax rate (30% plus 4% cess), that is ₹1,24,800 of extra tax this year, recovered only in the year the bill is paid. Paying one month late also costs about ₹4,00,000 × 17.25% ÷ 12 = ₹5,750 of non-deductible interest.

The rule covers micro and small manufacturers and service providers registered on Udyam; it is generally understood not to apply to purchases from traders or from medium enterprises. Check each supplier's Udyam certificate and keep the dates of acceptance on record.

Setting sensible credit terms

1. Decide terms by customer, not by habit. Long-standing, reliable buyers can get 30 days; new or slow payers should get shorter terms or advance payment.
2. Build the cost into price. If 60-day terms cost you about 2% of sales in interest, quote accordingly.
3. Put terms in writing on the quotation, purchase order and invoice, with a due date rather than "30 days".
4. Set credit limits per customer and stop dispatches when overdue dues cross the limit.
5. Review ageing weekly and act on anything past due.
6. If you are an MSE supplier, print your Udyam registration number on invoices; it reminds buyers of the 45-day rule.

Key takeaways

• Credit cost = invoice × cost of funds × days ÷ 365; at 12%, 30 days costs about ₹986 per ₹1 lakh of sales.
• In the illustrative example, 30-day terms cost a ₹60 lakh wholesaler ₹89,178.08 a year including bad debts, or 7.43% of gross profit.
• Skipping a 2/10 net 30 discount is equivalent to borrowing at about 37% a year; take it if your funds cost less.
• MSE suppliers must be paid within 45 days (15 days without a written agreement), or interest at three times the Bank Rate applies.
• Late MSE dues are deductible only on payment under Section 37(2)(g) of the Income-tax Act, 2025 (old Section 43B(h)).