How well-versed are you with the financial lingo?
Startups, freelancers, or small businesses mostly goof up with the payment terms, initially. Some payment terms are straightforward and in simple English but some are just hard to understand, especially when you are a fresher in business. It’s okay to not know all the financial terms, right from the onset. However, it is crucial to know the very basics of invoicing like the net terms – Net 30, Net 60, Net 90.
According to recent research, 64% of small businesses worldwide struggle with late invoice payments.
What are net terms?
To encourage the client to make a payment, businesses agree to offer clients net terms where the clients get services today and are given a flexibility grace period of certain days to settle down the payment. Most businesses offer Net 30 payment term.
What does Net 30 means?
– Payment is due in full within 30 days
Clients get 30 days to make payment and enjoy interest-free credit before the full amount is due.
Net 30 is trade credit term that signifies the payment is due in net 30 days after the transaction is done. In fact, if the clients are able to make payment earlier then the businesses also choose to offer good discounts.
If a business is using this trade credit and if the client fails to make full payment within 30 days then they can be charged with late payment penalties.
Understanding discount on Net 30
Vendors generally offer discounts to clients who pay before time.
Discounts are not necessarily a must have but it’s good to have if your business uses the Net term on a regular basis.
Net 30 payment terms example:
2/10 n/30 – so how is this interpreted?
This means that the customer would get a 2% discount if the payment is made within 10 days from the day when the invoice was issued otherwise net is due in 30 days.
For example, an invoice for freelancing work charged $1200 has Net 30 payment term. This means the payment for service provided should be done within 30 days. The time starts from the day full service is provided. So if you wait for 30 days you will have to pay the full amount ($1200) but if you make the payment within 10 days from the day when the invoice was issued then you need to pay $1,176 (charges after applying 2% discount).
Pros of Net 30 payment terms
- Customers get an incentive to pay up earlier and by extending the payment period you are encouraging them to buy from you. So it’s a win-win situation.
- Just like credit cards are popular, even trade credits like net terms are popular as it gives customers the flexibility to pay within the grace period of 30 days.
- Offering discounts also encourages quick payment.
- You are able to sell to clients even with cash flow problems as they find a flexible payment period beneficial and this, in turn, helps you to grow sales.
- By offering a grace period, you show trust on customers which builds customer loyalty.
Cons of Net 30 payment terms
- Since you are ready to pay discounts on early payment, there are chances of your margins becoming thinner.
- If your small business is already suffering from poor cash flow then offering Net 30 can put you in trouble
- If you notice clients paying you much late can again cause you cash flow problem
- In case of new clients, you can’t be sure if they would be able to pay you or not, so better avoid Net 30 option.
Don’t go for Net 30 terms, if dealing with new clients better opt for due upon receipt payment term.
Related article – Invoice Payment Term Made Clear – Payment Due Upon Receipt
Do you think you should offer all your customers, net payment 30 terms?
Though it is a good move to establish a long-lasting and solid business relationship, it can be a risk. Not all businesses or industries can offer their clients this payment term.
Which industries can use Net 30 payment terms?
Whether your business will be benefited with this trade credit, majorly depends upon the size and financial strength of your business. Any manufacturing industry or product distribution line can opt for Net 30 payment term.
Here are common businesses/industries that can use Net 30 payment terms:
- Creative agencies like web designing, interior designing firms
- Cleaning services who require tools and supplies frequently
- Apparel industries that buy in bulk on regular intervals
- Restaurants and cafes for ordering ingredients and kitchen needs
- Wholesalers and retailers
Any business who is low on cash can procure good on Net terms while any business who is financially secured enough to offer grace period payment can provide Net terms. It’s basically a win-win situation.
Small businesses selling to other small businesses have to think twice before choosing trade credit option as there are possibilities of delayed payments and poor cash flow.
However, Net 30 payment terms give you a competitive edge as not all companies offer this flexibility of payment to their customers. It definitely builds solid business relationships as the customers feel motivated with discounts and trusted with grant period.
Net 30 has both advantages and downsides, but it’s all about how you balance.
A super quick explanation
What does net 60 mean on an invoice?
Net 60 payment term on an invoice means the customer has a time period of 60 days to make the payment before the bill is overdue. Since it is a longer payment term, it is not frequently used by the businesses. The customer is likely eligible for net 60 payment term when the purchase is generally large.