What do net 30 payment terms mean?Reading Time: 5 minutes
Most small business owners are likely to say that getting paid on time is one of the exciting parts of running a business. Invoice payment terms such as the net 30 payment terms offer your customers a short-term credit period after purchasing goods or services.
As a growing business, does it benefit or hurt your company to offer customers short-term or long-term credit periods?
This article will discuss the net 30 payment terms, how it works, who should use it, the challenges, and more.
Let’s get into it.
What are net 30 payment terms?
These are standard payment terms used on invoices to specify the payment due date. While there are other net payment terms like the net 45/60/90, the net 30 terms are frequently used by small businesses.
Let’s say a customer purchases Burberry perfume from the RockyWears store. The invoice issued by RockyWears has a due date with a note informing the item buyer that payment is due in 30 days.
This means the customer can choose not to pay immediately but has a 30-day window.
How do net 30 payment terms work?
As the name suggests, working with net 30 states that payment is due within 30 days on your issued invoices, and the customer is obligated to pay.
While setting a due date is standard practice and should be adhered to by customers, it doesn’t always rule out the situation of late payments or bad debts.
To reduce late payments, you could state on the invoice note that failure to pay up at the due date attracts a percentage fine. You could also encourage customers to pay earlier by issuing early payment discounts within the first 5,10, and 15 days.
What businesses use the payment terms?
While net 30 encourages buyers to purchase items or services, it isn’t preferred by every business. Net 30 serves as a short-term credit meaning a company won’t receive payment for at least 30 days, which could affect cash flow.
However, customers benefit more as they can receive products or services without paying upfront. It also allows them to make returns or cancellations without any financial commitments.
Net 30 is commonly used by medium to big-sized companies with good working capital and cash to handle day-to-day expenses. These companies could offer their customers extended trade terms of net 30, 60, or sometimes 90.
On the contrary, small businesses looking to grow their customer base may not fancy net 30 due to the cash flow risk it poses. Net terms could vary with different customers depending on trust level and credit history.
Trusted customers could get a net 30 to 60 payment terms, while new customers could start with payment on invoice issuance, net ten or net 15.
So, you have decided to experiment with net terms; let’s see…
How to offer net terms to your customers
You could explore different options for invoice payment terms.
- Invoice due upon receipt
- Custom net terms
- Specific terms
- Discount for early payments
- Charges for late payments
Invoice due on receipt
When uncertain about a customer’s creditworthiness, it would be best to play safe by issuing an accounting payment term that demands them to pay on receiving the invoice.
Again, this doesn’t guarantee payment and may not even be welcomed by some customers. However, it will help you understand their creditworthiness.
Custom net terms
You could work with a combination of net terms depending on your relationship and the trust level of customers.
Net terms such as net 5,10 could be used for newer customers, while net 15, 30, and 45 could be used for those with established credit history with your company.
Also, understanding the strength of a customer can help you define net longer payment terms.
Specific net terms
Net terms could be defined based on the customer’s records and don’t necessarily have a standard credit period.
You could ask the customer to pay 3,5, or 8 days after receiving the invoice.
The goal here is to improve your help your cash flow with shorter payment terms and not to offer generous credit terms to businesses larger than yours.
Early payment discount
Offering discounts is a great way of incentivizing customers to pay up what they owe your business.
On an invoice with a net 30 payment term, you could add a note informing the customer of a percentage discount if the invoice is paid within the first ten days (2/10 net 30).
Charges for late payments
If a little scare gets you paid early, why not? You can add a late payment fee for customers who are notorious for exceeding the payment due date.
The late payment fee is applied if the customer has 30 days to pay an invoice and fails to pay within the given date.
Before implementing, it would be best to check the laws governing how much fees you are permitted in the customer’s location.
Are there benefits of using the net 30 payment terms? Let’s look at the advantages and disadvantages.
Advantages of net 30 terms
- Sell to more customers: Net 30 gives your customers short-term credit, generating more sales. Customers with cash flow problems at purchase won’t miss out on your services.
- Business competitive edge: Some businesses could insist on upfront payment from customers. Offering a net 30 payment option can give you a competitive advantage in your industry.
- Work with large businesses: When dealing with big companies, transactions usually take some time due to their internal approval processes. Offering a net 30 payment term gives these businesses the room to work with you.
- Reward customers: The early payment discount method allows you to reward your early-paying customers. This benefits your business in two ways – pleased customers and early payment.
Disadvantages of net 30 terms
- Bad debt: When you offer the net X terms to businesses, you risk not getting paid and being forced to write off some expected income. You could decide to take the customer to court; however, depending on the money owed, that may not always be the best option.
- Low operating cash: Offering customers credit may leave your business with little money required to handle your day-to-day operations. When you are low on operating cash, purchasing supplies or other goods and services your business needs becomes challenging and could hurt your business.
- Slower Cash Flow: Unlike large companies, small businesses generally need fast cash flow to manage everyday business operations. Customers enjoying the extended credit could decide to pay later, causing your business cash flow problems.
Final thoughts – is net 30 terms right for my business?
Deciding on whether you need to offer net 30 terms to customers depends on a couple of factors.
These factors include but are not limited to your business cash flow knowledge of the customer’s credit history, the nature of the business, the industry, and more.
It may be a disadvantage to your company to be the only one who doesn’t offer net 30 terms to customers in a market where competitors do.
You could explore offering a combination of net terms tailored to each customer. To do this efficiently, you need to use accounting software with invoice automation tools and reminders that ensure you don’t miss any due dates.
If your business is yet to have a stable cash flow rhythm, consider asking for upfront deposits.
With the Retainers app, you can minimize bad debts. You could also request a credit history check on the customer.
Net 30 Terms Frequently Asked Questions (FAQs)
What does “2/10 net 30” mean?
A customer enjoys a 2% discount if the amount due is paid within 10 days of receiving the invoice. Otherwise, the amount is paid in full within 30 days.
When exactly does net 30 start?
The due date in net 30 terms can vary depending on the agreement between the client and your business. The 30 days for payment start counting the day you issue the invoice or on any specific date as agreed.
Does Net 30 include weekends?
Net 30 always includes calendar days (i.e., weekends, holidays, and business days).
What does “net 30 EOM” mean?
Net 30 end of the month means that the payment is due 30 days after the end of the month.