As far as invoicing payment terms go, Net 30 is one of the most popular terms in use by businesses all over the world of all sizes.
Small, medium and larger business, including freelancers, often use Net 30 payment terms on their invoices. However, while it is standard, it doesn’t work the same way for all business sizes. And, especially for small businesses, it can cause a lot more harm than good.
Today we’ll explore what Net 30 is, its advantages and disadvantages, and most importantly how to protect your business from the bad parts while benefiting from the good ones.
What is Net 30?
Essentially, Net 30 is the standard invoice payment term that allows customers 30 days to pay their invoices.
Technically, however, Net 30 is a form of short-term credit that the supplier extends to the client. This is because even though the goods or services have already been delivered, the supplier delays the payment for 30 days.
Net 30 is such a common invoicing payment term that it is the default in many counties, such as in the UK, where clients are legally obliged to pay their suppliers within 30 days.
Although Net 30 is standard, it doesn’t have to be the only term. Larger businesses especially often increase the payment term, using Net 45, Net 60, or even Net 90.
What are the advantages of Net 30?
The primary advantage of Net 30 is that the credit is being extended for 30 days interest-free. When you allow your customers to delay payment by 30 days, you are providing a strong incentive for them to purchase from you.
Therefore, the benefit to the supplier is that your business is more attractive to the client, and you will have more business due to this incentive.
For the clients, on the other hand, Net 30 allows them to keep their cash for longer. This works well for consumers but is also a strong consideration for businesses.
If you are in the B2B sphere, your clients are allowed to hold onto their cash for longer. If they can delay their cash outflows, they will improve their overall cash flow.
This is great for accounting and the fact that they are more able to meet their financial obligations.
What are the disadvantages of Net 30?
Net 30 may be good or bad for your business depending on the size and financial stability of your business.
Not beneficial if you have few clients
For the most part, however, Net 30 offers more benefits for financial stable, larger businesses. This is because they normally have regular and multiple sources of revenue.
They have many clients who can pay them on a regular or rotating business so that the wait between submitting an invoice and having one paid is not difficult to bear. They may also have enough revenue from one payment cycle to be able to survive until the next payments.
Smaller businesses, on the other hand, don’t have the luxury of a large amount of clients. In fact, many small businesses (just starting out or micro businesses) have perhaps one or two main clients that bring in the major part of their revenue.
Due to that, these businesses may not have enough revenue to be able to wait 30 days for payment.
Disagreements on when Net 30 begins
Secondly, many clients seem to be unsure of exactly when the 30 days in Net 30 actually begin.
Some believe that it begins on the date the invoice is issued, while others believe it is the date the invoice is received.
Even others believe that it is from the date that they get paid from their own clients. In these situations, the supplier may have to wait 60 or more days for payment.
Here the supplier has a few bad options. First, he can just continually extend credit until payment is finally paid.
Alternatively, he can take the client to small claims court or simply cut his losses and move one—neither of which is a particularly good option.
How to use Net 30 wisely
Although the benefits can often outweigh the advantages, Net 30 doesn’t have to be all bad. There are ways to use it to your advantage, with a few adjustments.
#1 Agree with your client on when Net 30 starts
The first important thing you need to do is to agree with your client exactly what the start date is. For most people, Net 30 begins from the date the invoice is issued, not received.
That means that, if you are shipping your invoice with the goods and it takes a full week, then your client will only have 23 days left to pay the invoice.
#2 Use lower Net terms
If the 30-day waiting period is too long for you, you don’t have to write off Net 30 completely. Instead, you can simply decrease the amount of days you’ll allow for payment.
Many small businesses now use Net 21, Net 15 or even Net 10. However, while it means you’re getting paid faster, it also means your clients (or potential clients) have less incentive to buy from you.
#3 Charge for late payments
According to Net 30, only the 30-day period should be interest-free. On day 31, you should be charging a late fee, and continually do so each week or month that the invoice is unpaid.
You should add on a percentage charge (say 5% of the total invoice amount) for each period that the invoice is unpaid. That is fair and acts as an incentive for the client to be on-time with his payments.
#4 Give Net 30 only to trusted clients
The last thing will be to segment your clients and only give out Net 30 terms when you have built up a good relationship with your clients.
For example, if you have new clients you can choose not to use Net terms at all, or use Net 15. After 3-5 successful, timely payments, you can upgrade that client to Net 30. That way, you won’t get burned by clients who take advantage of Net 30.
With these four steps above, you’ll see that Net 30 can have advantages for your business. And, with better invoice payment terms, you’ll have better cash flow and better business overall.
About the Author:
Bernard Meyer is the Head of Marketing at InvoiceBerry, the online invoicing software committed to helping small business owners send out invoices quickly and professionally. You can also find him on Twitter and LinkedIn