Net 30 is one of the most common invoicing payments terms that is used by business of all sizes all around the world.
Net 30 is a payment term that allows the client 30 days to pay the invoice submitted by the supplier.
While it is a standard payment term, it is not always the best for all business types. In fact, for small businesses especially, it can present a lot of dangers. If you’re not careful, these dangers can cause your business to fail.
Today, I’ll go deeper into looking what Net 30 actually is and why people use it. Then I’ll talk about all the dangers your small business could be facing, and how you can adapt Net 30 to your advantage.
What exactly is Net 30 payment terms?
Net 30, as stated above, is one of many invoice payment terms. It allows the client 30 days to pay the invoice in full.
Technically, Net 30 is a form of short-term credit, by which you are extending extra time, interest-free, for the client to pay for the goods and services already delivered.
This is a default in many businesses and locations around the world. In fact, in places like the UK, clients are actually obliged by law to pay their suppliers within 30 days unless both parties have agreed to different terms.
While standard, Net 30 is not the only payment terms. You can use Net 45, Net 60 or Net 90. Many larger businesses use bigger Net payment terms.
Why do businesses use Net 30?
There are quite a few advantages to Net 30 for both the supplier and the client.
For the supplier, it is a way to attract new clients. That’s because Net 30 offers delayed payment. Delayed payment is one of the many ways that are very attractive for customers, as they can get the product for absolutely nothing now, and only later have to provide payment.
For the client, it offers 30 days to find money to pay for a product or service. This increases the incentive they have to purchase from you.
If your client is a business, then 30 days’ extra time to pay means that the client has longer to hold onto his or her cash. That means that, by delaying their cash outflows, they can increase their cash flow in general.
With better cash flow, they look better to investors and, more importantly, are in a better position to meet their regular financial obligations.
Why is Net 30 dangerous?
The benefits of Net 30 can extend to businesses of all sizes. However, it tends to favor larger businesses more than small businesses.
1. Size matters
This is mostly because larger businesses have the luxury of having multiple clients at the same time. While they’re waiting 30 (or more) days for their invoices to be paid, they are getting paid from their other clients.
It is either the rolling incoming payment or the fact that they get an adequate payment during their payment blocks (for example, the beginning of the month) that they are able to meet all their financial obligations for the period.
Smaller businesses unfortunately don’t have that luxury. While many small businesses have a good amount of clients, many more have only a few. In fact, there is a significant portion of small businesses (new and micro) that have only one or two major clients.
What happens then is that they are just not able to wait the 30 days to receive payment. They have pressing financial obligations (loans, bills, salaries) and they need to be paid in order to pay for those.
2. Confusion about when the period begins
Secondly, many clients may not be aware of exactly when the 30 days begin. Should the invoice be paid 30 days from when the invoice was issued or received? Or—frustratingly for many clients—should the invoice be paid 30 days from when the client receives payment from his own client?
That last one is particularly difficult for small businesses, but it is one that happens far too often.
What the supplier then has to do is continuously extend the client more short-term credit until payment is eventually received (while continuing to do more work).
Either that, or to take the client to small claims court or forget about the invoice entirely. None of those options are attractive whatsoever.
How to fix Net 30?
It doesn’t have to be all bad though. Net 30 can be good for your business. You just need to make a few adjustments.
1. Agree on when Net 30 begins
The first and most important thing to do is to make sure you and your client agree when the 30 days begins.
It should be 30 days from the date the invoice is issued, not received. Therefore, if you ship goods along with your invoice, and it takes 7 days, then the client has 23 days left to pay the invoice in full.
2. Change the Net terms
Another thing you can do is to not use Net 30. Instead, you can shorten the payment terms to Net 21 or even Net 15.
That means that, even if your client is 10 days late, with Net 15 you can get your payment in 25 days, rather than in 40 days (as with Net 30).
3. Always have late fees
During Net 30 terms, the client has interest-free time to pay. However, you shouldn’t do that continuously, for example, if the client is late.
You should always have a late fee (for example, 5% of the total invoice amount) beginning on day 31. That will provide adequate incentive for the client to pay you on time.
4. Only give Net 30 for trusted clients
Lastly, you can implement a policy by which you only offer Net 30 once a client has gained your trust. You can do this by offering Net 30 after 3 or 5 successful, timely payments have been made.
During the introductory period, you can offer Net 15 or even Net 10 payment terms. After that, “upgrade” your client to Net 30.
With these effective, proven tips, you can make Net 30 work for your business. You’ll be able to avoid the dangers associated with this common invoice payment term and help your business truly succeed.
Author Bio: 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.