Prepay vs. finance: is the early-pay discount worth it?
Suppliers often knock a few percent off seed, fertilizer or chemicals if you pay months ahead. Whether that's a good deal depends on how early you pay and what the money costs you in the meantime.
Compare the discount to the interest
Why the discount is really an interest rate
A prepay discount is the supplier paying you to lend them money. If you pay $82,450 today instead of $85,000 in 150 days, you're lending them $82,450 for 150 days and getting $2,550 back for it. Put on an annual basis, that's the "discount is worth" figure:
annual rate = (discount ÷ (1 − discount)) × (365 ÷ days early)
With a 3% discount over 150 days, that comes to about 7.5% a year. If your operating line costs 7.75%, borrowing to prepay loses a little money. If you're prepaying with savings that earn 4%, it's a good deal. The same discount can be a good or bad deal depending on where the money comes from.
Count the days correctly
"Days paid early" runs from the day the money leaves your account to the day you would otherwise have paid. That's the normal due date, not the delivery or application date. If the normal terms let you pay 30 days after delivery, count to that date. Getting this wrong is the usual reason a discount looks better on paper than it is.
Tracking several of these at once? The free farm bill due-date tracker keeps them in date order.
Quick reference
What common discounts are worth per year, before compounding:
| Discount | 60 days early | 120 days early | 180 days early |
|---|---|---|---|
| 1% | 6.1% | 3.1% | 2.0% |
| 2% | 12.4% | 6.2% | 4.1% |
| 3% | 18.8% | 9.4% | 6.3% |
| 5% | 32.0% | 16.0% | 10.7% |
The shorter the time and the bigger the discount, the better it gets. A small discount offered in November for a product you won't pay for until June is often not worth borrowing for.
Questions people ask
How do I turn an early-pay discount into an interest rate?
Divide the discount by what you actually pay, then scale it to a year: (discount ÷ (1 − discount)) × (365 ÷ days paid early). A 2% discount for paying 120 days early works out to about 6.2% a year. If your loan costs less than that, borrowing to prepay comes out ahead.
What about a 2/10 net 30 discount?
That means 2% off if you pay within 10 days, otherwise the full amount is due in 30. You're paying 20 days early to save 2%, which works out to about 37% a year. It is almost always worth taking, even on a credit line.
Is there any risk to prepaying?
Yes. Once you prepay, the money is the supplier's until the product is delivered. If the dealer has money trouble before then, you could end up as a creditor. With a supplier you don't know well, ask how prepayments are protected, or prepay only what you can afford to lose.
Does prepaying help with taxes?
It can. Under IRS rules, cash-basis farmers can often deduct prepaid farm supplies in the year they pay for them, subject to limits (generally no more than half of your other deductible farm expenses). That's a question for your tax preparer, and this calculator leaves taxes out.
Should I use cash or borrowed money to prepay?
If you have the cash, use what it would otherwise earn (savings or money market rate) as the rate. If you'd draw on a line to prepay, use the line's rate. The calculator works the same either way.
Related tools
Not financial advice. These calculators give estimates from the numbers you enter. Your lender's terms, fees, day-count method and tax situation can change the result. Check with your lender or advisor before you act. Full disclaimer.