Net 30 payment terms simply mean that an invoice’s due date is 30 days from the date of the invoice. You may also see: “Payment due 30 days from date of invoice,” which means the same thing. Net 30 is one of the most common payment terms you will see on an invoice, but you might also see net 10, net 15, net 60, or other timeframes.
As a business, you have to decide how and when you want to be paid, and there are several ways you can choose to collect payment from your customers. Companies may require payment in advance, at the time of service, or at the end of a contract, for example.
Another way to set your payment terms is by invoicing your clients and allowing them to gain the value of your goods or services before payment. A trade credit, essentially. Today we’ll take a look at exactly what net 30 means, how it affects your cash flow and the advantages and disadvantages of these kinds of payment terms.
How net 30 works
There are a lot of details that need to be included on an invoice, such as the date of sale, the description and quantity of the goods or services, the breakdown of costs, and the invoice date. Another important element of the invoice is the amount of time the customer has to pay the bill.
That’s where net 30 comes in. When a customer pays for services or products after the fact, you’re basically extending credit much like a credit card or loan, sometimes known as a trade credit. Net 30 means they have 30 days from the invoice date to settle the bill.
The net 30 standard of payment is one of the most common invoice payment terms that small businesses use. However, that timeframe can vary based on individual cash flow needs or the customer in question.
For example, new clients may be required to pay within net 10, say, but existing customers may be given the full 30 days (or net 60 or net 90) after the invoice date to submit the full payment.
Benefits of net 30 payment terms
There are a lot of advantages companies can realize by offering net 30 payment terms. Plus, altering the payment terms are key ways to reward customer loyalty, build new business, and discourage late payments.
Offering net 30 or other variable payment terms can be a solid strategy to help build new business. Because many businesses require immediate payment at the point of sale or services, a company that’s willing to extend its credit terms can often attract new clients by giving them this grace period.
This can be useful to businesses that have cash flow problems, for example, because it gives them extra time to make money before needing to settle that particular bill. If this situation sounds familiar, you may want to consider looking for some extra financial help to make your bill payments. Take a look at some of the business loan lenders to get started.
Encourage early payment
Obviously, late payments are something no business wants to see. Thus, coming up with different ways to encourage customers to pay on time should be a priority. Or, even better, companies may test different strategies to find a way to get customers to pay earlier.
One method to accomplish that is to offer an early payment discount. This can incentivize a customer to save, say, 5% on their bill if they pay early. On the invoice, the payment terms could be spelled out like this: 5/7 net 30. Simply put, if they pay within seven days of the invoice date, they can take advantage of the early payment discount offer and deduct 5% off their bill.
Ultimately, net 30 is a way to foster a good relationship with your customers. By giving your clients time to pay their bills, you build customer loyalty, which is at the core of most businesses. Customers who come back over and over are the bread and butter that keeps a business on track as they continue to try and attract new customers.
Disadvantages of net 30
Despite the advantages of using net 30 invoicing practices, there are some drawbacks as well. It’s important to remember that by giving clients an extended payment period (rather than requiring them to pay immediately), businesses are acting much like a credit card company does when it approves a line of credit.
That means many small businesses are taking on the risks and responsibilities of lending money on credit terms without most of the benefits or safety measures most lenders have.
Anytime a business extends credit, there is the potential for payments coming in late. This is disruptive to your business and can also be a nuisance for your accounting department, which has to deal with collecting overdue payments. Charging a late fee can sometimes help to mitigate the problem, but there’s not a lot you can do beyond that.
Also, from an accounts payable perspective, late payments from clients mean your own company may miss due dates and pay late. This can make it more difficult for a company to purchase supplies and other goods needed to complete its existing work. By extension, that can also make it harder to take on new business.
Even worse than a late payment is no payment at all. Obviously, you wouldn’t do business with that company again, but your options are limited on recovering the money in the event of non-payment.
You can basically either send them to a debt collections agency or take them to court — both of which will cost you more money on top of the cash that’s already owed. You may decide that, in the long run, pursuing it isn’t worth your time or money.
Slower cash flow
Even assuming that all of your customers pay on time or even pay early, offering trade credit with generous payment terms to clients does result in a slower cash flow.
For big businesses, net 30 payment terms may not create cash flow problems because they presumably have a lot more coming in than some small to medium businesses do. In fact, some small business owners may find that offering net 30 terms may put them in a precarious financial position and is thus not a viable business strategy.
Here is a list of the benefits and drawbacks to consider.
- The grace period may attract new customers
- Can offer an incentive or discount for early payments
- Could build customer loyalty by offering some breathing room between payments for repeat customers
- Always at risk for late payments and delinquent accounts
- Cash flow could suffer without requiring immediate payment
Maximizing net 30 invoicing
Back in the day, invoices were always sent through the mail. If you neglected to pay by a specific date, you’d be sent a second notice, then a third notice, and so on. Eventually, you would start getting phone calls and maybe get sent to a collection agency. Needless to say, this was a huge burden on accounting departments and did very little to improve cash flow.
Fortunately, technology has done wonders to streamline invoicing and other accounting procedures. Companies of any size need to take advantage of these advances to maximize their manpower as well as their profits.
For example, if you want to give incentives for paying early (as mentioned previously), you can alter your credit terms and employ early payment discounts. With automated invoicing, a business can set up friendly reminders to notify clients that early payments will receive a discount.
Automatic invoices can also be used as a way to prompt customers that they are nearing their payment date, have missed a due date, or are seriously overdue. You can even have the invoices automatically apply late fees after a certain amount of time has passed, when applicable. Basically, automating invoices (and harnessing other technological advances) can help a business grow and attract more clients by freeing up other resources.
Why do companies use net 30 payment terms?
The main reasons that businesses employ net 30 terms are to drum up new business and cultivate customer loyalty. Existing customers get the advantage of not having to immediately pay their invoice or potentially be rewarded for early payment. At the same time, new clients can be drawn in by the prospect of having a little breathing room between receiving the product or service and paying for it.
What does 2/10 net 30 days mean?
If you see this on an invoice, a business is indicating that it’s willing to offer you a 2% discount if you pay within 10 days after the invoice date. The net 30 term means your bill is not officially due until 30 days after the invoice date, but if you take advantage of the early payment discount, you enjoy 2% off the cost of goods or services purchased.
What does net 30 EOM mean?
EOM stands for “end of month.” If net 30 EOM shows up on your invoice, it means your bill isn’t due until 30 days after the end of the month. For example, if the invoice is dated April 12, your bill’s due date isn’t until May 30.
- Net 30 is a shorthand way to indicate on an invoice that payment is due 30 days from the invoice date.
- Allowing clients to delay payment for 30 days is sometimes known as a trade credit. This means you, as the business, are offering your customer a short-term, 0% interest loan.
- Net 30 payment terms can help to retain existing clients while attracting new business.
- That being said, net 30 can sometimes create cash flow problems for small business owners, who may need that money to continue to operate their company.
- Offering early payment discounts and charging a late fee are two ways to incentivize customers to pay early or at least on time.
- To ease the burden on accounts receivable, a business can maximize net 30 invoice processes by using automated invoices, payment reminders, and overdue notices.
View Article Sources
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