Finance

What are Net Payment Terms?

Net payment terms are a short-term line of credit extended by a business to the custome

Net payment terms are a short-term line of credit extended by a business to the customer. Net payment is the total value of goods and services before tax. Net payment terms refer to how quickly an invoice is due after the billing date. Put another way, this is the latest date a business expects to receive the payment in full. 

Net payment terms are generally written with a number, indicating when the invoice is due. Net 30 means the merchant expects full payment within 30 days after the billing date. Likewise, Net 10 means the merchant expects full payment 10 days after billing. 

There are variations on these expressions used to incentivize buyers to pay on time, but the mostly commonly used net payment term is Net 30. 

Why Use Net Payment Terms?

Net payment terms are used by businesses to account for the time a product is in transit to reach the customer. Net payment terms are also commonly used for service-based businesses such as contractors, freelancers, and consultants. 

The primary advantage of using net payment terms is that buyers have a greater incentive to purchase if they can delay payment. Most buyers will keep the product once they have received it. For both product-based and service-based businesses, getting the customer to make the purchase is key, and net payment terms can add a significant incentive.

Net payment terms can also be a way to reward loyal customers who typically pay on time by extending the net payment period. On the flip side, new customers or customers whose payment history isn’t consistent can be given shorter net payment terms.

Variations of Net Payment Terms

While Net 30 is the most common net payment term, there are many variations commonly used by businesses of all sizes. The most common net payment terms are:

  • Net 60 — Payment is expected within 60 days of invoice date.
  • Net 30 — Payment is expected within 30 days of invoice date.
  • Net 15 — Payment is expected within 15 days of invoice date.
  • Net 10 — Payment is expected within 10 days of invoice date.
  • Due on receipt — Payment is expected as soon as invoice is received.

For discount incentives, payment terms can be written slightly differently. There can be any variation of discounts for payment and due date. Here are two examples of commonly used discount net payment terms: 

  • 1/10 Net 30 (1/10, N30) — Payment is expected within 30 days of invoice date, but the buyer will receive a 1% discount if payment is received within 10 days.
  • 5/10 Net 60 (5/10, N60) — Payment is expected within 60 days of invoice date, but the buyer will receive a 5% discount if payment is received within 10 days.

Businesses will need to select net payment terms based on their total volume, the type of goods or services offered, and consumer expectations. Generally large businesses can afford to offer payment incentives and longer net payment terms, while small businesses will need shorter net payment terms to manage cash flow. 

Disadvantages of Net Payment Terms

For large companies, net payment terms are often the standard of operation. For small and medium-sized businesses, the danger of net payment terms is problems with cash flow management. Small businesses may not have the resources to wait for invoices to be paid. 

This is especially true if buyers interpret net payment terms differently. Some buyers will believe that Net 30 payment terms start from the day the product is received, not the day the invoice is issued. Others will assume that transit and shipping is not included in the Net 30 payment. 

For small businesses that depend on the steady, ontime cash flow of payments to produce new products and services and generate more income, longer net payment terms can lead to serious cash flow issues. For this reason, we recommend that small and medium-sized businesses using net payment systems also request a credit card backup or perform a credit check before extending net payment beyond Net 10 to customers. 

How to Use Net Payment Terms

Net payment terms can appear on an invoice either at the top, or at the bottom in the terms and conditions. Net payment terms do not have to be standardized for the business. They can be customized to each client based on payment history, credit history, and order volume. 

When issuing invoices, select the net payment terms that make sense for your customers, product or service, and cash flow needs. When receiving invoices in B2B transactions, keep in mind that ontime payments will build long-term business relations. The line of credit extended is a line of trust between businesses. Use net payment terms to build successful, long term business relationships and continued business growth. 

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