What is Net 30 on an Invoice?
In the U.S., “net 30” refers to a very common payment term that means a customer has a 30-day length of time (or payment period) to pay their full invoice balance. Net 30 payment term is used for businesses selling to other businesses, and the 30 days includes weekends and holidays.
As an incentive to get paid sooner, this payment term is sometimes paired with a discount if the customer or client pays before the 30-day net term.
Understanding Net 30
When you shop at a retail store and pay cash, there are no payment terms. You pay immediately.
If you shop with a credit card, you pay the retailer, but the credit card company extends the terms. You have until the due date set by the credit card company to make a payment without a penalty. Fail to make that due date, and you pay interest on the purchase.
With the credit card, you have a payment term, or due date, to pay without penalty. It’s a formal way of creating an agreement between a buyer and seller about the timing of payments. You’re just missing an invoice.
But why even have a payment term?
Its origins go back to the days before transactions were automated. Back then, it could take 30 days or longer to review invoices, match invoices to purchase orders and goods receipts (if applicable), and generate payments. As a result, net 30 payment terms became a standard.
You can consider a payment term, also called a trade credit, as a no-interest loan to your customer. Instead of demanding immediate payment for a sale, with a net 30 payment term, you are lending your customers money for 30 days.
When Does Net 30 Start?
To offer Net 30 terms, you must have sufficient cash flow to float the equivalent of a 30-day loan. But when does net 30 start?
- The date of the invoice?
- The day your product shipped?
- The day it reached your customer?
- Some other trigger?
The start date of the payment term can be any one of those options. The key is to make sure the terms are agreed to upfront – before the sale is even made.
Consider this scenario:
- You send an invoice with net 30 terms.
- In your mind, the 30-day countdown starts on the date of the invoice.
- In your customer’s mind, the 30-day countdown starts on the date they received the invoice.
When the customer pays you on time, according to their understanding of the net 30 terms, you feel they have not honored the agreement. To you, they have made a late payment, so the relationship is strained.
How you resolve this misunderstanding will determine whether you retain that client. That’s why it’s important to precisely define when the clock starts ticking on your net 30 term. In most cases today, it starts at receipt of the invoice, regardless of the invoice date.
Net 30 vs. Due in 30 Days
Net 30 payment terms and “due in 30 days” generally refer to the same outcome: your supplier wants you to pay the invoice in one month.
A net 30 payment term is common in B2B commerce, and is often combined with an early payment discount. You, as the customer, can pay the bill within 30 days to meet that term, or pay earlier for a discount if your supplier offers one. Due in 30 days more often applies to personal expenses such as utility bills, telephone bills, mortgage statements, and related expenses. In these cases, you have 30 days to pay the bill before incurring a penalty or surcharge.
With personal bills, the due date is typically called out as a specific date, so there is no confusion about when you need to pay. That removes any uncertainty over start dates relating to “due in 30 days.” In addition, personal bills rarely, if ever, offer a discount option for paying early.
How Do You Use Net 30 Terms?
When using Net 30 terms, here are a few things to consider:
|Do your customers pay their invoices on time?||If they do and your finances are healthy, there’s no incentive to include an early payment discount|
|How steady is your cash flow?||If you are having cash flow issues, offering early payment discounts with the net 30 term can help accelerate revenue collection and improve your cash flow.|
|What are the payment terms used by other companies in your industry?||You could implement shorter payment terms such as Net 15 or Net 20 and improve your cash flow if those terms are common in your industry.|
|When are your own bills due?||If your account payable turnover is faster than your accounts receivable (you pay your bills faster but take longer to collect), that can lead to cash flow problems. You may want to consider tighter payment terms than net 30.|
|Who has the dominant position in the relationship?||The financially stronger company often holds the advantage in payment terms negotiation; however, if a smaller supplier provides key products or services, that supplier can dictate payment terms.|
Examples of Net 30 Payment Terms with Early Payment Discounts
While the net 30 payment term stays the same, the early payment discount offer can vary.
One common term is 2/10 net 30. Which simply means if the buyer pays the invoice within 10 days, they will receive a 2% discount.
Here are examples of net 30 payment terms combined with discounted rates for early payment.
|2%/10 days, Net 30 terms (2/10 Net 30)||2% discount if you pay within 10 days. That’s a 36% return on cash for the discount.*|
|1%/15 days, Net 30 terms (1/15 Net 30)||1% discount if you pay within 15 days. That’s a 24% return on cash for the discount.|
|1%/10 days, Net 30 terms (1/10 Net 30)||1% discount if you pay within 10 days. That’s an 18% return on cash for the discount.|
|1%/5 days, Net 30 terms (1/5, Net 30)||1% discount if you pay within 5 days. That’s a 14.4% return on cash for the discount.|
|.5%/10 days, Net 30 terms (.5/10 Net 30)||.5% discount if you pay within 10 days. That’s a 9% return on cash for the discount.|
*To calculate the annualized return of an early payment discount, divide the number of days you accelerate payment ahead of the due date by 360 (to represent the days in a year, rounded down), and multiply that number by the early payment discount rate.
Pros and Cons of Net 30 Terms
There are plenty of advantages to buyers and sellers for using net 30 terms.
Sellers may use it because it:
- Meets customer expectations. Net 30 is a standard payment term.
- Builds goodwill and conveys trust in your customers.
- Standardizes cash flow and streamlines your budgets.
- Attracts and retains new customers.
- Reduces bad debt. Customers can usually pay within 30 days.
- Builds revenues. Net 30 terms makes it easier for new and small businesses to buy goods and services, which translates into more business for the seller.
Buyers also have reasons to embrace net 30 payment terms:
- Net 30 is interest-free vendor financing.
- The ability to delay payment to 30 days improves a buyer’s liquidity.
- Net 30 terms makes financial planning and budgeting easy (or at least easier).
There are also disadvantages to sellers using net 30 payment terms. These include:
For small businesses, freelance contractors, and businesses with little leverage, a net 30 payment term can evolve into net 45, net 60 or net 90, negatively impacting their cash flow.
If others in their industry have shorter payment terms such as 20, 15, or even pay in five days, the net 30 payment term presents a disadvantage.
Likewise, if the early payment discount offers an exceptionally high annual rate of return to the buyer, as shown in the table earlier, the seller would be paying a high interest rate in exchange for getting their cash sooner.
If you are a startup business, you may end up strapped by extending credit to your buyers. While giving them the benefit of time, you could be setting yourself up for failure if you don’t have the cash reserves to compensate for delays in payments.
Net 30 Alternatives
While net 30 has been a common payment term for business, for larger business-to-business customers, longer payment terms have become a standard. These include net 45, net 60, and net 90.
The benefits are obvious. Net 30 benefits the seller, as it accelerates the time it takes to recognize revenues compared to these other payment terms.
Conversely, net 90 payment terms greatly benefits the buyer, as the seller is essentially extending an interest-free loan for those 90 days, helping the buyer to improve its cash flow at the seller’s expense.
For some business transactions, there are no payment terms. Immediate payment is demanded at the time of purchase of the product or service. This typically would occur in a case where the buyer has a poor payment track record, or no record at all.
Should You Use Net 30 Payment Terms for Your Business?
To answer this question, you should know:
What is the standard payment term in your industry? If you are a new business or in a weak bargaining position, you may not be able to buck the standard. The net 30 payment term may be expected as the default.
If industry practice or your own research shows that you could improve your cash flow with a more favorable payment term, there’s no reason not to consider it. If you have leverage with your customers, or limited competition for your business, you would be in a better position to consider these different terms.
One other thing to consider is that one payment term does not need to fit all customers. You could negotiate distinct payment terms with different customers, and that could work to your financial benefit.
Importance of Net 30 Payment Terms
Net 30 payment terms help to generate business, as it is the equivalent of extending an interest-free loan to customers for those 30 days. It can lend a consistency to revenue recognition that may not be there with no terms at all.
Whether or not you offer net 30 terms depends in large part on your own company’s financial health. If you can afford to extend that payment term, it’s probably worth the goodwill it generates among your buyers.
Not only does it convey trust in your customers and offer them an opportunity to budget well, but the net 30 term could be standard in your industry, is usually readily understood, and often, expected.
For larger customers, the trend has been to draw out payment terms past net 30 to net 45, 60 and 90 days. In that case, you may have to fall in line with these payment terms as part of doing business.