What is Net 30? Everything You Need to Know
All you want to do is get paid.
But if you’re new to sending invoices, you have to learn the lingo first.
Especially when there are so many payment terms used – I mean, what is net 30, net 60, and net 90? And what do payment terms like 2/15 net 30 mean?
Should you use net 30 terms for your business? What are the pros and cons?
Don’t worry, we’ve got you covered. In this article, you’ll learn everything you need to know about net 30 payment terms.
Let’s jump in.
- What Are Net 30 Payment Terms?
- What Is Net 60?
- What Are Net 30 Discount Terms?
- What’s the Difference Between “Due in 30 Days” and Net 30?
- When Do the 30 Days Begin?
- The Advantages of Net 30 Terms
- The Disadvantages of Net 30 Terms
- Do All Businesses Use Net 30 Terms?
- Should I Use Net 30 Terms for My Business?
- Use Alternative Payment Terms
- How to Get Paid on Time With Net 30 Terms
- Summary: Net 30 Terms
What Are Net 30 Payment Terms?
Net 30 is the name of a payment term in which the full payment is due within 30 calendar days.
What’s more, net 30 terms allow businesses to offer discounts to clients if they pay the invoice before the 30-day deadline.
OK, the “30” bit is obvious, but why “net”?
When it comes to finance, the word “net” refers to the amount left over after deductions and other adjustments have been made.
OK, but how exactly do net 30 payment terms work?
Well, when you offer net 30 terms to your client, you’re offering a type of credit. In other words, the client can receive the goods or services without actually having to pay for them for up to 30 days.
Net 30 terms are extremely popular all over the world.
For example, clients in the U.K. have a legal obligation to pay their suppliers within 30 days unless stated otherwise.
What Is Net 60?
OK, get ready for your mind to be blown…
Net 60 terms are the same as net 30 terms – except the payment is due within 60 days instead of, well, 30.
Here’s the thing:
You can use this payment term format for any length of days, such as net 7, net 10, net 14, net 15, net 30, and net 60.
What Are Net 30 Discount Terms?
Net 30 payment terms allow businesses to offer custom discount terms to each client. These discounts are designed to incentivize clients to pay the invoice early.
Let’s look at some net 30 payment terms examples.
Say a business wanted to offer net 30 terms with a 2 percent discount if the client were to pay within 15 days. On the invoice, these payment terms would be written out as “2/15 net 30.”
Here are some more net 30 payment terms examples:
- 5/14 net 30: Five percent discount if the payment is made within two weeks; otherwise, the full amount is due within 30 days.
- 1/10 net 30: One percent discount if the payment is made within 10 days; otherwise, the full amount is due within 30 days.
- 3/30, net 60: Three percent discount if the payment is made within 30 days; otherwise, the full amount is due within 60 days.
- 2/15, 1/30, net 60: Two percent discount if the payment is made within 15 days and a one percent discount if the payment is made within 30 days; otherwise, the full amount is due within 60 days.
This format makes it easy for businesses to offer customized discount terms to individual clients.
What’s the Difference Between “Due in 30 Days” and Net 30?
“Due in 30 days” simply means that the full payment is due within 30 days.
On the other hand, net 30 is a credit term that allows businesses to provide discounts to incentivize clients to pay early.
When Do the 30 Days Begin?
There are many different ways to structure net 30 payment terms. So, the date they start is up for you and your client to agree on.
It’s also important to note that net 30 terms always include calendar days (i.e., weekends, holidays, etc).
The 30 days could start:
- When you dispatch the goods to be delivered to the client
- When the client receives the goods
- Once the service is completed (i.e., when the advertising campaign goes live)
- When you send the invoice to your client.
Another way to agree on the timeframe is to use the acronym “EOM.”
This stands for “end of month.” It means that the payment is due 30 days after the end of the month in which you send the invoice to the client.
For example, if you invoice your client on Oct. 12, the payment would be due on Nov. 30 – 30 days after the end of the month of October.
Whichever start date you decide to use, make sure it’s explained clearly in your contracts and invoices to avoid confusion.
The Advantages of Net 30 Terms
Let’s cut to the chase:
If a client doesn’t have to pay you for 30 days, they’re much more likely to place an order with you – or to increase the size or scope of their order.
Why? Credit softens the blow and helps people manage their cash flow.
It’s partly why there are 374 million open credit card accounts in the U.S., according to the American Bankers Association.
But that’s not all. Unlike credit cards, this type of credit is interest-free.
Offering interest-free credit is a great way to demonstrate that you trust and value the relationship you have with your client.
And let’s not forget, good relationships are crucial to success.
Another key benefit to net 30 terms is that you can provide different discount options to incentivize your clients to pay early.
This creates a win-win situation.
If your client pays early, they will receive an extra discount. Sure, you get slightly less money, but you get it earlier and can use it to manage your cash flow.
If they pay on time, they still get 30 days of interest-free credit and you get the full amount.
Plus, if you have steady clients who buy from you every month, net 30 is only an issue for the first month. After that, you’ll receive a payment from them every month anyway.
Now, let’s take a look at the downsides to net 30 terms.
The Disadvantages of Net 30 Terms
The key disadvantage of offering net 30 payment terms is that they make it difficult to manage cash flow.
It means you’ll deliver a product or service and won’t be paid for up to one month.
Let’s look at some net 30 payment terms examples.
Say that you’re a wholesaler selling children’s toys to retail stores. You’ll have to pay for the cost of buying the toys, storing them, and shipping them to your client – all without receiving any of the money from the client.
Or say that you provide a service such as freelance web design, and it takes you one month to complete the project. Once you’re done, you invoice the client with net 30 terms – now, you won’t be paid until two months after you started working on the project!
And let’s not forget, not every client pays on time…
As a result, net 30 payment terms can be challenging or even dangerous if you don’t have plenty of cash in the bank – especially if you rely on just one or two clients to bring in the bulk of your revenue.
Do All Businesses Use Net 30 Terms?
In short, nope.
Net 30 payment terms typically work best with larger businesses who have the money to survive generous payment agreements such as net 30, net 60, and net 90.
Smaller businesses and freelancers tend to try to avoid net 30 terms, preferring to get paid upfront or as soon as they deliver their service.
It’s also worth noting that net 30 terms are almost exclusively used in B2B (business-to-business) transactions, such as a farm selling fruit to a local supermarket.
B2C (business-to-consumer) businesses rarely offer such terms.
I mean, imagine taking a new pair of jeans to the counter or ordering an espresso and asking the cashier to pay in 30 days…
Instead, consumers typically use credit cards to access credit.
Should I Use Net 30 Terms for My Business?
If you answer “yes” to most of the questions below, it’s likely net 30 terms are a good choice for your business.
- Do you have multiple clients or streams of revenue?
- Can you afford to comfortably provide your product or service without being paid for at least three months?
- Are you keen to offer competitive payment terms to your clients to incentivize them to work with you?
- Do you trust the client?
- Do you and the client communicate well together? Can you convey the payment terms with clarity and avoid confusion?
If you don’t have multiple sources of revenue, plenty of wiggle room when it comes to late payments, or you don’t trust the client completely, it’s best to avoid net 30 payment terms.
That said, what if you’re a freelancer hoping to work with larger businesses?
In this case, you’ll almost certainly need to offer net 30 payment terms. Remember, larger organizations tend to have slower payment cycles and will expect net 30 terms as standard.
OK, but what if you can’t afford to offer net 30 payment terms?
Use Alternative Payment Terms
If you’ve just started a business and haven’t yet created reliable sources of revenue, it might be best to avoid net 30 terms for the time being.
Instead, you could offer payment terms that help to create financial security.
For example, you could offer net 7, net 10, or net 15 payment terms. Or you could ask your client for an upfront deposit on large orders, the full payment upfront, or payment upon the delivery of the goods or service.
How to Get Paid on Time With Net 30 Terms
If you decide to offer net 30 payment terms, here are five things you can do to ensure everything goes smoothly and you’re paid on time.
1. Only Offer Net 30 Terms to Clients You Trust
This is the cardinal rule of net 30 and net 60 terms.
If you offer net 30 payment terms to new clients or clients that you don’t fully trust, you’re asking for trouble.
If you don’t have a history with the client or you don’t know them well, start by asking for payment upfront or upon delivery of the goods or services.
2. Communicate Clearly
It doesn’t matter how trustworthy a client is if they don’t properly understand your payment terms.
As the playwright, George Bernard Shaw once said, “The single biggest problem in communication is the illusion that it has taken place.”
Without clear communication, something will eventually go wrong. Make sure to clarify what your payment terms mean in detail so that you’re on the same page.
And remember, “net 30” is confusing for the less business savvy.
A large wholesale business is far more likely to understand net 30 payment terms than a part-time freelance web designer.
3. Offer Compelling Discounts
This is one of the key benefits of using net 30 terms.
These discounts allow you to extend credit to your clients, while also increasing your chances of being paid sooner rather than later.
You can offer percentage discounts for early payments using the format explained above.
Alternatively, you can offer incentives like future credit on their next order, bonus merchandise, or an additional free service.
Whatever discount you decide to offer, make sure it’s explained clearly in your invoices and contracts.
4. Charge Fees for Late Payments
Unfortunately, not every client pays on time.
Late payments can wreak havoc on your cash flow – not to mention your nerves! So, it’s only fair that clients agree to a late payment charge or interest on the amount owed.
Again, always make sure your client understands and agrees to these terms before providing your product or service.
5. Be Courteous
Last but certainly not least, be exceptionally courteous.
Why? Courtesy goes a long, long way when it comes to getting paid on time.
In fact, according to accounting software Freshbooks, adding “thank you” and “please” to your invoices increases your chances of getting paid by more than 5 percent.
Summary: Net 30 Terms
Net 30 can be a confusing term.
However, it’s worth understanding this widely used payment term so that you can communicate clearly with your clients and get paid on time.
Here’s a rundown of the key takeaways:
- Net 30 is the name of a payment term in which the full payment is due within 30 calendar days.
- You can use net 30 terms to offer discounts to clients if they pay their invoice before the 30-day deadline.
- Net 30 discounts allow for more flexibility than the simpler term, “due in 30 days.”
- Different businesses start net 30 terms at different times, so make sure to clarify when the countdown begins.
Remember, offering net 30 terms can help you to grow your business.
By extending short-term credit to your clients you can help them to manage their cash flow. As a result, they’re more likely to purchase from you or to increase their order size.
That said, if you can’t afford to provide a product or service without being paid for a couple of months, it’s best to offer alternative payment terms.
What are your thoughts on net 30 payment terms – is it a great opportunity or a dangerous hazard? Let us know in the comments below!