Net 45 is an invoice payment term businesses can offer customers with approved business credit accounts.
This article explains the meaning of net 45 and its importance, states the advantage of combining net 45 with early payment discounts, presents net 45 alternatives, and lists the pros and cons of net 45 credit terms.
What is Net 45?
Net 45 is a payment term for vendor invoices issued to customers on credit for payment in full within 45 days from the invoice date unless otherwise specified. A vendor may offer early payment discount terms for paying sooner. An example is 1/10 net 45, meaning the customer pays the invoice within 10 days instead of 45 to earn a 1% discount.
Understanding Net 45
Vendors choose payment terms to invoice customers with approved business credit accounts. Net 45 is a credit term, meaning invoice payment to a vendor is due within 45 days. Net 45 is slightly better for customers than typical net 30 payment terms because it offers them 15 more days to pay the bill.
If a purchase order or other contract is used, the document will indicate credit terms to be used for invoicing. Businesses often use standard purchase order credit terms for all customers unless payment is required before delivery (with COD terms) for very slow-paying customers, poor credit risks, or customers without an established credit history.
Vendors may charge interest on past due amounts as late fees for a customer’s late payments. Not all suppliers enforce the late fee provision of invoice terms.
When Does Net 45 Start?
Net 45 usually starts on the invoice date, which is the date the invoice was created with the vendor’s accounting software. The invoice date may differ from the shipping date or delivery date. Invoice payment is due in full within 45 days from the invoice date unless another start time, like from receipt of goods date, is specified on the invoice.
How To Calculate Net 45 Terms
For an invoice payment due date, calculate the latest date that is within 45 calendar days from the invoice date. The invoice can be paid to reach the vendor by the due date. If early payment discount terms are offered in combination with a net 45 payment term, pay within the number of discount days offered to earn the discount.
Accounting software or higher-level ERP systems with integrated AP automation software automatically calculates invoice due dates, depending on the payment terms, and make efficient automated global mass payments of approved invoices with a choice of payment methods.
Does Net 45 Include Weekends?
Yes, net 45 includes weekends. Net 45 is calendar days, not business days. The invoice payment term also includes holidays.
Examples of Net 45 Payment Terms
Examples of net 45 payment terms include:
|Net 45||Invoice is due in full within 45 days with no early payment discount offered|
|2/10 net 45 terms||2% discount if you pay within 10 days; otherwise full payment of the invoice is due in 45 days|
|1/15 net 45 terms||1% discount if you pay within 15 days; otherwise full payment of the invoice is due in 45 days|
|1/10 net 45 terms||1% discount if you pay within 10 days; otherwise full payment of the invoice is due in 45 days|
|1/7 net 45 terms||1% discount if you pay within 7 days; otherwise full payment of the invoice is due in 45 days|
A business receives the entire 1%, 2%, or another discount percentage for paying within the number of stated days for the early payment discount. On an annualized basis, that percentage is actually much higher.
The formula for computing the annualized value of the early payment invoice discount is:
Annualized value of discount = Discount % X 360
100 – Discount % n
where 360 is days in a year and
n = maximum number of days to pay without discount – the number of days to pay for a discount
Solving for 2/10 net 45 discount example:
Annualized value of discount = 2% X 360
Annualized value of discount = 2 X 360
Annualized value of discount = 21%
If a business has adequate cash or access to loan financing, it would be beneficial to take the discount. To justify borrowing to pay the invoice early for a discount, the annual loan interest rate is less than the annualized value of the discount, an easy hurdle to meet.
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Pros and Cons of Net 45 Payment Terms
Using net 45 payment terms has pros and cons for the buyer and seller.
Pros of Net 45 Payment Terms
- Interest-free financing on accounts payable for the buyer that improves cash flow
- 15 more days for the buyer to pay without discount vs common credit terms of net 30
- Buyers save money on purchases by taking early payment discounts and paying a net amount
- Sellers offering net 45 payment terms with early payment discounts are paid quickly, reducing the risk of bad debt on uncollectible invoices if discounts are taken
- Sellers increase business revenue and get new clients or customers by extending credit terms
- Sellers gain a competitive advantage if competitors in the industry offer net 30 terms requiring payment sooner
Cons of Net 45 Payment Terms
- Net 45 is a longer payment term than typical 30-day business credit terms
- Seller is tying up cash in accounts receivable longer
- Seller is assuming greater credit risk of non-payment if customers pay other trade creditors with shorter invoice terms like net 30 first
- If customary trade credit terms in your industry are longer, net 45 payment terms may not be competitive
Net 45 Alternatives
Net 45 alternatives for credit terms offered to customers vary. Some examples, including other net terms, are listed below. More examples are included in the linked payment terms article.
Due on Receipt
Payment is due immediately upon receipt of the goods or services.
Net 10, Net 15, Net 30, Net 60, Net 90
Payment is due within 10, 15, 30, 60, or 90 days. The vendor may combine these credit terms with early payment discount terms like 2/10 net 30, which offers a 2% discount for invoice payment within 10 days or payment of the full invoice balance due in 30 days. Instead of a 2% discount, the vendor could offer a 1% discount.
45 Days End of Month (45 EOM)
45 days End of Month or 45 EOM means an invoice is due 45 days from the end of a month in which an invoice is dated. For example, an invoice dated May 4, 2022, is due 45 days after the month-end May 31, 2022.
The COD payment term is cash on delivery or collect on delivery. The UPS or other carrier collects the payment from the customer upon delivery before giving the customer custody of the goods.
The FOB (free on board) Shipping Point payment term is invoiced when the goods leave the vendor’s warehouse facility because the title transfers to the customer at that point. FOB Destination means the products are invoiced to the customer when they reach the destination city. FOB only includes shipments via sea freight involving ports and is commonly used for international shipments.
Should You Use Net 45 Payment Terms?
Businesses should decide between using net 45 or typical net 30 payment terms unless an alternative payment term fits the industry, international shipping standard, or customer’s credit situation. To get paid sooner, combine the net 45 payment terms with a 1% or 2% discount offered for invoice payment within 10 days (1/10 net 45 or 2/10 net 45).
Importance of Net 45
Net 45 is an important credit term because it allows customers to pay 15 days later than the more common payment terms of net 30. Net 45 could give well-financed businesses a competitive advantage if they’re willing to take the risk and tie up their cash in accounts receivable longer or offer an early payment discount combined with the net 45 credit terms.
Small businesses especially like having net 45 accounts and net 30 accounts. When accounts payable credit terms are extended to customers, it replaces the need for immediate cash or charges on the business owner’s or employees’ personal credit cards and debit cards.
Offering any type of credit term to qualified customers will help a business increase its revenues. The necessity is properly vetting customers for credit risk and credit account approval.
Your business should decide whether combining the net 45 terms with an early payment discount to attract timely payment is feasible. Feasibility means your company’s product or service contribution margin is adequate to accept the discounted invoice amount if a customer takes the prompt payment option.