Comparing Apples to Apples  –  How to Compare the True Cost of Capital

Using APR to Compare Early Payment Options

As a supplier, you probably see lots of different offers to get paid early:

• Invoices with static terms like 2/30, net 31
• Cards and lines of credit quoted with APR
• Dynamic discounting programs, such as C2FO Early Pay™

It makes it hard to see which option is really the lowest cost of capital.

The trick is Implied APR

We can translate each option and make them comparative by calculating the implied APR. Once you see the APR, it is much easier to line up your choices.

Implied APR is a standardized metric used to express the cost of early invoice payment as an annualized interest rate. By converting a flat discount percentage into a yearly rate based on the number of days payment is accelerated, this figure allows businesses to compare the cost of early payment programs directly against other liquidity options, such as bank lines of credit, factoring, or asset-based lending.

Quick example on a 100 dollar invoice

Assume your standard term is net 31.

You already offer a static discount:

• 2/30, net 31
  The buyer takes 2 percent off if they pay on day 30.

Now you are looking at whether a dynamic discount is worth it:

• But it’s an extra 0.5 percent if they pay on day 10 through a program like C2FO Early Pay™.

What this tells you

• The static 2 percent for only 1 day (day 31 to day 30) is extremely expensive when you annualize it.
• The extra 0.5 percent cost to move payment from day 30 to day 10 works out to about 9 percent APR.
• If your card or line of credit costs more than that, using the dynamic early payment can be the cheaper and faster way to fund your working capital.
  

When this approach can help you

Looking at implied APR is useful when you:

• Need cash earlier for inventory, payroll, or growth.
• Want to assess options and know if an extra discount is worth it.

Working Capital Tip: 

Treat each option as a cost of capital in APR terms, put the numbers side by side, and choose the lowest and fastest source of working capital.