When you’re selling a product or service, one of the biggest things on your mind is compensation. Sending an invoice to your client ensures that you get fair and timely payment for the goods you’ve provided. When it comes to the timeline for payment, however, there are a few different options you may wish to pursue.
One popular payment term is “net 30.” But what exactly does net 30 mean? Is it the only payment term out there? Should you be using it for your business? This guide will answer all these questions and more, helping you to make the soundest decision for your company.
Before we can discuss net 30, we need to define a few other key terms first. You might be wondering, “What does ‘term’ mean?” or “What does ‘invoice’ mean?” Answering these questions is vital to giving you a full understanding of payment options.
Here are a few quick definitions to be aware of:
- Term: A term can also be referred to as a “payment term.” A payment term indicates how long a buyer has to fulfill the full amount of an invoice to the seller.
- Invoice: An invoice is a commercial document that a seller issued to a buyer. Invoices outline the products and services that were provided to the buyer, how much they cost, and payment details including timelines and accepted forms of payment.
- Trade credit: Trade credit is a credit that sellers will extend to buyers allowing them to pay after the transaction date, as opposed to providing payment on the spot.
Definition of Net 30
Net 30 is a payment term (involving trade credit) which means that the merchant expects a complete payment within 30 days of the date on the invoice. This payment term is by far the most common and is generally accepted in all industries. Net 30 is favored by many because it gives incentive for a potential buyer to purchase since they know they will not have to pay in full right away.
For instance, let’s say you issue your customer an invoice dated August 1. The client then has until August 31 to pay the invoice in full. In some cases, you may decide to offer a discount for payments completed quicker, but we’ll discuss this at length in a bit.
“Net 30” vs. “Due in 30 Days”
Often, the terms “net 30” and “due in 30 days” are used interchangeably. They are essentially the same agreement, since “due in 30 days” means exactly what it sounds like. However, this phrase doesn’t typically allow for discounts for early payments in the way that a net 30 agreement might.
In general, if you’re dealing with a client who’s new to the business or isn’t as up to date on all the lingo, you may be better off referring to your invoice as a “due in 30 days” agreement. This practice simply ensures that everyone is on the same page and there’s no confusion as to when the invoice payment is expected.
Other Invoice Payment Terms
While “net 30” is by far the most common invoice payment term, it’s certainly not the only one. You have a wide range of terms available to suit whatever fits your business best. For instance, a closely related term is “net 60,” which provides the buyer with a 60-day window, starting from the day of completion, to pay for their order in full.
1/10 Net 30 refers to an agreement wherein the purchaser will receive a 1% discount off of their purchase price if full payment is made within 10 days. Similarly, a 2/10 Net 60 agreement means that the purchaser will receive a 2% discount off of their purchase price if full payment is made within 60 days. In either of these cases, if the payment is not received in full within 10 days, the purchaser is expected to pay the full price (no discount) within 60 days.
Net 30 EOM is another payment term you may have heard. This agreement means that the customer has 30 days after the end of the month when the invoice was sent. For instance, let’s say you and your client have net 30 EOM terms and you send them an invoice on February 22. That payment will be due on March 31, which is 30 days after the end of February.
Finally, you may hear the term “due on receipt.” This payment term essentially means just what it sounds like: payment is due when the customer receives the invoice. Ideally, you’d get the payment on the same day, but typically this phrase means that payment is due by the next business day.
Let’s say you’ve invoiced your customer for a $100 purchase with an invoice date of June 15. Here is what that payment might look like under these different terms:
- Net 30: A payment of $100 is expected on or before July 15.
- Net 60: A payment of $100 is expected on or before August 15.
- 1/10 Net 30: A payment of $99 will be accepted on or before June 25, or a payment of $100 is expected between June 26 and July 15.
- 2/10 Net 60: A payment of $98 will be accepted on or before June 25, or a payment of $100 is expected between June 26 and August 15.
- Net 30 EOM: A payment of $100 is expected on or before August 31.
- Due on receipt: A payment of $100 is expected on June 15 or the next business day.
Pros and Cons of Using Net 30 Payment Terms
Net 30 payment terms aren’t for every business, so weigh the pros and cons before deciding on this method.
There are certainly a lot of benefits to employing net 30 payment terms with your customers. One of the biggest advantages of net 30 is the incentivization. As we mentioned briefly, potential buyers are more likely to move forward with a purchase if they know they don’t have to pay right away. You’re also putting trust in your customers and can improve your reputation this way.
However, net 30 does have its disadvantages as well. Smaller businesses may suffer by having to wait for payments to come in, but it can be hard to add buffers like penalties and interest without sacrificing your customers’ opinions. It might also be difficult to establish these terms with new customers who you haven’t gotten to know well yet and who you don’t yet consider trustworthy.
For a quick recap:
- Customers are incentivized to purchase.
- You have the flexibility to offer discounts for quicker payments.
- You gain trust from your clients and build a reputation as a good company to work with.
- Small businesses may struggle waiting for payments.
- Customers might be driven away by interest or penalties for late payment.
- It’s not recommended to use net 30 terms with new clients since you haven’t established a relationship yet, making it difficult to keep track of payment terms between different clients.
Should You Use Net 30?
Every business will find that a different payment term works for them, and there are a few key things you can consider before making your decision. Think about how big your company is and the types of products you’re offering. Smaller businesses often can’t wait 60 days to receive payment for an invoice, and so they use 30-day terms instead.
In general, smaller companies will do better with shorter invoice terms, and larger companies can afford to offer longer invoice terms with discounts to incentivize their customers to pay quicker.
If you do choose to use Net 30 payment terms, ensure that you and your customer are on the same page. The term can cause some confusion, so just outline the agreement in advance. For instance, specify that the 30-day timeline begins from the day the goods and services were provided rather than the time the invoice was received.
The 30-day period outlined in a Net 30 invoice payment agreement includes the time that products take getting to the customer, such as shipping time. If you do choose to use a Net 30 payment term, be sure this statement is clearly communicated to your customer, as some can assume that the 30-day period doesn’t begin until they’ve received the product.
Another big distinction to make whether the 30-day period solely includes business days (hint: it doesn’t). For net 30 payment terms, weekends and holidays are included. Be sure to specify this to your client so they don’t think they actually have around 40 days if weekends aren’t included.
Take Control of Your Payments with DEAR
No matter which payment terms you’re using with your clients, you want a reliable software to help you keep everything straight. DEAR Systems offers cloud ERP software that connects all your sales channels in one convenient platform. Our features help businesses manage their purchasing, sales, inventory management, point of sale, accounting, and more. Contact us today to start your free trial!