Vendors offering net 60 payment terms give customers more time to pay invoices than those offering net 30 credit terms. This article explains the meaning and importance of net 60.
What is Net 60?
Net 60 is a payment term that sellers offer credit customers to pay invoices within 60 calendar days from the invoice date. The net 60 credit term with due date may be combined with an early payment discount, such as 2/10 net 60, offering a 2% discount for paying within 10 days or no discount for paying the invoice within 60 days.
Understanding How Net 60 Payment Terms Work
Understanding how net 60 payment terms work includes understanding how trade credit is granted, standard variations of the net 60 payment term, how net 60 terms are included on POs and invoices, and how to calculate and record early payment discounts
Business Trade Credit Approval
A supplier’s credit department approves or declines new customers for credit accounts and sets a credit limit after performing a credit check with business credit bureaus. To perform the credit check, vendors use the company‘s name and address, or a DUNS number at Dun & Bradstreet (D&B) or a similar identifier for other credit reporting companies.
Business credit reporting agencies evaluate company strength, time in business, and payment history, issuing scores and ratings. Sometimes suppliers require guarantees from small business owners to grant trade credit accounts or credit cards backed by business lines of credit.
Vendors may decline trade credit to small businesses and companies with cash flow problems. The startups need to build business credit first to get trade credit from more vendors. Newer companies may find it easier to get net 30 terms vs. longer payment terms like net 60 terms initially.
Standard Net Payment Terms, Including Net 60
Vendors often have standard net payment terms (net D for net days) like net 30 or net 60 for customers as trade credit unless payment upfront is required. Suppliers may combine net terms with an early payment discount. The number of days is calculated as calendar days, not business days, by which invoice payment is due in the x-day period. Counting days for the net 60 payment term due date includes weekends and holidays besides the business days.
Invoice payment terms are negotiated in a contract or through an accepted purchase order. Upfront payments are required when a customer doesn’t qualify for credit terms, or the upfront costs are high, as in construction.
Supplier Use of Invoice Factoring to Extend Trade Credit
If supplier cash flow is tight, sometimes these sellers use accounts receivable factoring through a financing company. Invoice factoring lets sellers receive cash payments before accounts receivable are collected from their customers. This early payment for accounts receivable through factoring lets vendors offer payment terms like net 60 to customers.
Net 60 Payment Terms on Purchase Orders and Invoices
Customers accepted for net 60 credit terms by a vendor receive a tradeline that charges them no interest if they pay invoices on time before the due date. If a customer invoice payment isn’t received within 60 days, vendors may charge interest after a grace period for late payments, according to their credit terms.
Generally, the 60 days begins on the invoice date. But the invoice may specify another date like receipt date or shipment date.
These vendor invoices show net 60 as the time payment term if no discount for early payment is offered as a payment option. If the vendor offers a prompt payment discount to the customer, the payment term on the invoice may be 2/10 net 60 or 1/10 net 60.
2/10 net 60 and 1/10 net 60 mean the customer must pay the invoice within 10 days to receive a 2% or 1% discount, respectively, or pay the full invoice amount within 60 days.
Payment terms offered by a vendor are shown on a customer’s purchase order (PO) and invoice. The invoice indicates the invoice date and, preferably, the payment due date. The vendor enters specific payment terms like 2/10 net 60 into the payment terms field of the customer’s account when it’s set up. When vendor invoice data enters the customer’s system (preferably electronically), the same payment terms are included.
The vendor invoice is coded to inventory or expenses and accounts payable until paid.
How to Calculate and Record Early Payment Discounts
If the customer takes the early payment discount offered on an invoice, their accounting software will calculate a discounted balance to pay. The calculation multiplies the discount percentage times the invoice amount owed and subtracts the discount amount from the full amount due without early payment.
Check with your state to see how taking early payment discounts affects the amount of sales tax owed. Some states offer exempt sales tax status when purchased inventory goes into manufacturing products.
Customers and vendors will record the early payment discount amount in their accounting systems when recording payments made or accounts receivable collected.
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Seller Alternatives to Using Net 60 Credit Terms
Besides net 60, suppliers offer trade credit account terms, including:
Net 30 for full invoice payment within 30 days and 2/10 net 30, offering a 2% discount for paying an invoice within 10 days, are the most popular payment terms for business invoices.
Net 60 Payment Terms Examples
Examples of net 60 payment terms for trade credit follow.
Net 60 invoices are due in full in 60 days, typically beginning on the invoice date.
Wholesale Net 60
Wholesalers or distributors sell their clothing brands and other goods to retailers with net 30, net 45, or net 60 terms. Net 60 terms may allow the retail stores and eCommerce companies to sell the goods to ultimate customers before the supplier invoice payment is due in 60 days.
2/10 net 60
With 2/10 net 60, the vendor offers a 2% discount if an invoice is paid within 10 days. If the customer doesn’t take the early payment discount, the total amount of the invoice balance is due in 60 days.
1/10 net 60
For 1/10 net 60 payment terms, the vendor offers a 1% prompt payment discount if an invoice with these credit terms is paid within 10 days. Otherwise, the full amount of the invoice is due in 60 days.
Importance of Net 60
Net 60 is important for small businesses and larger companies purchasing products and services and their suppliers.
If the supplier’s cash flow and order profitability justify carrying accounts receivable for 60 days or it uses receivables factoring, offering net 60 terms may give the vendor a competitive advantage in winning new customers.
Customers improve their cash flow if they don’t need to pay invoices with net 60 terms for 60 days. These customers are incentivized to pay invoices on time to:
- Strengthen supplier relationships
- Build and maintain good business credit scores
- Avoid late fees or interest charges on past due invoices
- Ensure continued shipments of inventory by vendors when needed