Cost of discount -EAR – receivables

Hi,
Please can you help me to understand the meaning of the % annualised effective interest rate which is then compared to overdraft figure when managing account receivables.
I’ve seen examples where it’s used to decide if an Early payment discount is a worthwhile option to get cash in from receivables.
Why do we compound this discount for the number of periods in the year?
Surely the cost of borrowing is just the % discount that the invoice is reduced by?
Any help would be really appreciated – Thank you 🙂