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When you send an invoice with net 30 payment terms, you’re indicating to your customer that they have 30 days to pay the full amount for which they’ve been invoiced. Typically, invoices contain the pertinent details of the transaction, including the date of sale, description of the item or service, the item’s or service’s cost, delivery date, and date on which the payment is due. Instead of an exact due date, these terms specify that your customer has 30 days to pay you in full.
Whether you’re a small business, large enterprise, or an independent contractor, these payment terms are commonly found on invoices. So, it’s important to understand what net 30 payment terms mean, when they’re used, and if they’re right for your operations.
What Is Net 30?
Net 30 payment terms, commonly referred to as “net 30,” are a type of payment schedule that may be included on an invoice. Essentially, it’s a shorthand way of saying, “You must pay this amount in full within the next 30 days.”
How Do Net 30 Payment Terms Work?
One way to view net 30 payment terms is as extended credit to your customers. You’re letting them borrow your goods or services under the agreement that they’ll pay for the product within 30 days, at which point the transaction concludes. If a customer defaults on their payment, the merchant can decide to apply a late penalty.
At the time of invoice, you add the invoice amount to the accounts receivable section of your balance sheet. Upon payment, you subtract this amount from your accounts receivable and add it to your cash amount. That said, overseeing multiple net 30 invoices can be difficult. An estimated 64 percent of small and midsized United States-based businesses utilize computer or cloud-based software to help them manage invoice tracking. Bookkeeping and accounting software options can automate your invoice management and even send your customers payment reminder emails.
When do the net 30 terms start?
Your customer may interpret the due date of a net 30 invoice in a number of ways. A customer may assume the due date is 30 days after the date of sale, after the launch of service or delivery of goods, after the date of the invoice, or after the date of invoice receipt. This is why it’s incredibly important to communicate the expectations for payment before signing an agreement. Contracts should explicitly state the payment expectations.
Note: Unless otherwise specified, net 30 typically includes all calendar days, including weekends and holidays.
Advantages of Net 30 Terms
As a merchant, an advantage of offering net 30 payment terms is that it builds goodwill among your clientele. Generally speaking, customers tend to appreciate an extended payment period. You may also see an increase in sales when offering net 30 terms. The additional time allotted for full payment makes your products more attainable to clientele with limited cash flow, such as small businesses, independent contractors, or startups.
Challenges of Net 30 Terms
As much as your customers might appreciate net 30 payment terms, the long lead may also result in some of your customers simply forgetting to pay. It’s your responsibility to pursue late payments via payment reminders and/or late payment penalties.
Even worse, you could eventually be in a position in which you have to write off bad debt because clients didn’t pay at all. And unfortunately, this gives fraudsters never intending to pay a longer lead time to slip away.
In other words, net 30 payment terms are riskier than requiring full payment upfront. Before implementing 30 day payment terms into your business operations, weigh the advantages of a lenient payment policy against your business’s level of risk tolerance.
Is Net 30 Right for Your Business?
Whether net 30 payment terms are right for your business depends on your business’s specific operations. For wholesalers, payment terms of 30 days, 60 days, and even 90 days are common because retailers purchase inventory in bulk and must generate sales before they can pay for their purchase. Meanwhile, net 30 payment terms are less common for dropship transactions because retailers do not hold the inventory.
Whatever payment terms you decided are best for your business, you should consider automating your accounting and invoicing. And if you do allow your customers 30 days (or more) to pay for their purchase, an automated system tracking what you’re owed, by whom you’re owed, and when you should expect payment will mitigate many of the most frustrating factors deterring merchants from utilizing payment terms.
Alternatives to Net 30 Payment Terms
You don’t have to use 30-day payment terms. Instead, 10-, 15-, 60-, or 90-day payment terms may be more beneficial for your business operations. Additionally, invoices can also be due upon receipt. A few other variations include:
- Net 30 EOM: This payment term requires payment on the 30th day of the following month. If the invoice is dated February 15th, payment is due on March 30th.
- Early Payment Discounts: Payment terms reading, “2/10 Net 30,” indicate that your customer will receive a 2 percent discount if they pay in full within 10 days, but they do have 30 days to pay in full without incurring a penalty.
- Shorter Net Periods: Net 7 payment terms reportedly result in the payment in full before the due date 58 percent of the time, whereas 30 days (or longer) only see in-full payment before the due date 16 percent of the time.
Adjusting the amount of time allotted for customers to pay invoices isn’t the only way to improve on-time payments. Other methods include:
- Payment Installment Plans: Flexible payment installment plans can give your business an edge over others, potentially increasing customer satisfaction, retention, and overall sales.
- Credit Building: Though all net terms are a form of credit, if you report to the appropriate credit bureaus, small businesses and startups can build their business credit score through your payment terms.
Finally, you should consider offering several payment methods to your clientele. The easier you make it for your customer to pay you, the fewer excuses they have for failing to pay in full by the due date.
Net 30 Terms: Final Thoughts
Net 30 payment terms may not work for every type of business, but they tend to be beneficial for businesses with reliable clientele, solid cash flow, and an automated tracking system. Above all, you should talk to your clients about payment terms in advance. Open communication is a great way to avoid unnecessary confusion about the due date. And of course, accepting payments online offers your clientele an easy, secure, quick way to ensure they pay their invoice before its due date.