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August 09, 2022

What is Net 30 Payment Terms

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It can be tricky to get all invoices paid on time, which is why some businesses offer their customers more flexible terms. Giving enough time for clients to pay is a win-win situation since clients can properly manage their accounts payable, and businesses better plan when funds reach their bank accounts.

Net 30 payment terms might be those flexible terms. It’s a common practice preferred by small businesses that are clients of bigger companies. Keep reading the article to learn what net 30 means, how it works, and whether it’s the right approach for your business.

Understanding Net 30

Net 30 payment or billing terms is a term used in an invoice sent by the vendor to its client. The terms mean that the client is expected to pay in full for products or services within thirty days of receiving an invoice. Net 30 billing may be compared to a trade credit that a business provides to a customer.

Here’s a simple example. A business sends an invoice on January 2, 2022. If a business is using a net 30, then they expect a client to pay before February 1, 2022. The period of thirty days given by a business is almost like a credit extension received by the customer.

Note: Businesses use accounts receivable to track the clients’ debts. Some businesses also prefer using other types of terms, such as net 10, 14, 15, 60.

Net 30 Payment Terms: How do they Work?

Here is how net 30 payment works:

  • A business sets up a client in its automated invoice system.
  • Then the business puts the customer on payment terms of 30 days.
  • Then the business may decide whether to offer a discount in case a client pays early on.
  • The next step is to add payment terms to the invoice.
  • Then the business raises the invoice and sets a date of sending it out to the client.
  • The invoicing system should reflect when the invoice was sent and when the payment should be made according to set terms.
  • Finally, the business sends the invoice to the client.

The customer, in this case, is expected to pay within thirty days. Note: discounts for early payments may be effective if you want to get paid sooner.

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Why Use Net 30: All Benefits

Mainly smaller businesses benefit from such a system. Not all small companies have enough cash to be able to order and pay for goods or services. But if they are offered net 30 terms, they get a credit from the vendor.

It’s also a beneficial system for vendors who can take more clients. Bigger businesses may also offer other types of net payments such as net 60 or even net 90.

Note: This system is mainly used by big businesses that can survive for an extended period without their clients paying for their products or services. But eventually, businesses may significantly increase their incomes. Net 30 or other variants of this system are useful when a business is trying to find new clients.

What is Net 30 Payment Terms

When to Use Net 30?

As mentioned above, bigger companies use net 30 billing terms in the following situations:

  • when they can handle their clients not paying for extended periods;
  • when seeking new clients;
  • when trying to get more clients.

Other factors when considering net 30 payment terms include:

  • number of clients;
  • industry;
  • cash flow.

But the most important thing to consider is how generous a business can be with its clients. It’s common to choose net 30 billing terms if a business has plenty of clients so that the cash flow won’t go too low.

However, if a business has one or two clients, not much cash laying around, net 30 billing could get the company into trouble. It’s especially dangerous if clients won’t pay when it’s due — it can harm business operations.

It’s typical among businesses to raise sales by using net 30 terms. They make payment rules less strict by extending the credit. But this decision should never be based only on the desire to get more sales.

Always consider how long the business can survive without clients paying for an extended period. If you’re still convinced that net 30 is a good idea, consider the following precautions:

  • add a condition when the client has to make an upfront deposit on a large order;
  • add a condition that imposes an interest rate for late payments.

That way, new clients understand that you are serious about getting paid on time. In this case, a business gets new clients and increases sales.

Where to Put Net 30 on an Invoice?

It depends on your preferences. It’s possible to create a separate section on an invoice at the top. You may also opt for adding billing terms and conditions at the bottom of an invoice.

Understanding Net 30 EOM

EOM stands for the end of the month. EOM for net 30 means that the payment is due thirty days after the end of the month when the business has sent the invoice.

Here is a simple example of an EOM. A business and their client agreed to net 30 EOM. The business sends an invoice on April 15, and the payment is due on May 30. It means thirty days after April 30.

Understanding 2/10 Net 30

As mentioned in the article, businesses can offer discounts so that their clients pay early. Businesses will often provide clients with net 30 terms with a 2% discount if they pay within ten days. Such an agreement or offer is written on an invoice as “2/10 net 30.”

It’s common for businesses to offer other terms. It can be a net 60 with a 5% percent discount if clients pay within 15 days. In that case, the invoice would show “5/15 net 60.”

How to Start Using Net 30?

You should inform your clients first to get started. Contact all your clients that you are planning to use this billing system, and if they agree, you can change the terms and conditions on your invoices.

Factoring vs. Net 30

Small businesses often like the idea of net 30 billing terms, but they often face various problems disabling them to pay on time. In that case, a company may consider offering an invoice factoring option.

If a client agrees with these terms, the vendor offers any terms they wish and then sells unpaid invoices to a factoring company at a discount. The vendor gets immediate payment if necessary, and the factoring company waits for the client to pay.

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Author: Charles Lutwidge

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