What does net 30/60/90 terms mean?
An invoice due date is represented by this type of net term. Net means the customer must pay the whole amount. Net 30 means it’s due in 30 days, net 60 means it’s due in 60 days, and net 90 means it’s due in 90 days.
Among these are the most commonly used net terms, though they do vary by business and industry. As an example, some may offer net terms of up to 180 days, while others may offer terms as short as one week.
Payment timelines can also vary. A business can start this countdown when they make the sale or create the invoice, although some begin it when they postmark the invoice for mailing. A business makes this timeline clear to the recipient to ensure they pay on time. If the customer pays beyond the net term, additional interest fees may apply.
Related: What are Net 30 Terms?
What are digital net terms platforms?
You may not know that there are comprehensive net-terms-as-a-service products. Credit checking takes up a lot of your AR team’s time. The customer must fill out a credit application, call trade references, and make a credit limit decision. But even then, it is not risk-free.
Floating net terms credit involves financial risk for your business. With digital net terms solutions like Resolve, you can manage the entire process yourself. Credit checking, net-term financing, payment processing, and payment reminders are all part of what we do.
Increased customer loyalty
Net terms allow your customers greater flexibility regarding invoice payments, helping you retain their business and loyalty. You can also increase loyalty by offering additional benefits, such as discounts or competitive prices for your products. By allowing customers to pay on credit, you establish a sense of trust with them because you are relying on them to pay you back within a specific period of time.
The customers who appreciate your net terms may recommend your business and its services to the members of their network who need them. When someone gets a recommendation from someone they trust, they will be more likely to order from you. Word-of-mouth marketing is highly effective and valuable in this situation since you don’t spend money to attract customers.
How Do Net Terms Work?
A business owner who offers clients trade credit and net terms must first determine when their clients will repay them. Most business owners give their clients 30, 60, or 90 days to pay, also known as giving net-30, net-60, or net-90 terms.
To encourage clients to pay invoices sooner, most business owners offer discounts for early payments. For example, Giving a 2% discount to clients who settle their accounts within 10 days is quite common.
Some business owners know that some clients will take even longer to pay, no matter how generous the net terms are. According to a recent analysis of over 20 million invoices, 64% of small businesses face late invoice payments. The result is that many small businesses, particularly those that transact primarily with other small businesses (also known as SMB2Bs), must find multiple other sources of funding (like Fundbox ) in order to continue operating and growing. Most businesses that offer net payment terms also charge interest fees on late payments to deal with this reality.
Advantages of offering net 30/60/90 terms or credit terms
There are many reasons to offer net terms (also known as trade credit), including attracting new clients, growing your business, adding a competitive edge, and building customer loyalty.
Generate more sales
By offering net terms, customers (typically small businesses) will be able to buy products they wouldn’t otherwise. Payments are not due immediately, so barriers to purchasing are reduced. Small businesses are therefore more likely to buy on credit. Some customers may rely entirely on credit for their purchases. Net terms appeal to these customers. It is important to include your specific invoice payment terms on all invoices. If you offer longer payment terms, specify the amount, the due date, and the payment options. Net terms are usually interest-free.
Gain an advantage over competitors
If your business is stable and larger, you have an advantage over competitors that do not offer net terms. Net terms are common in some industries, so not offering them puts a company at a disadvantage.
If you want to acquire clients, you need to take the path of least resistance. This means purchasing something on credit even if there is a possibility of incurring late fees.
Net-term companies, like Hyperikon, will likely win more business than those that do not. And who wouldn’t want an extra 30 days to pay?
Disadvantages of offering net 30/60/90 terms
There are many positives to offering net terms, but there are also a few things you should know. The billing cycle will become longer, some customers may not pay at all, and there will be more overhead. It can also complicate your accounting software (Quickbooks) or invoicing software. Many small business owners do not want to take on the financial risk. However, for many businesses the advantages far outweigh the disadvantages.
Customers take longer to pay
If you offer net terms, repayment will take longer and may cut into your profit margin. Payment cycles will be extended, and your operations will change in order to accommodate a more extended payment cycle. When your client pays will also affect your working capital. At first, working capital may decrease significantly, but once payment cycles become more routine, working capital should return to previous levels. Be clear about any percent discount and specify the invoice payment date.
Some customers may not pay at all
While early payment discounts may be offered, some customers may choose not to pay at all. It may sound extreme, but nonpayment on net terms is common. However, nonpayments should be a very small fraction of invoiced customers. There are a lot of nonpayments if credit screening is poor. The companies are allowing customers on credit who do not qualify (because they don’t pay on credit).
How Net Terms Affect Your Cash Flow
Cash flow can suffer when you offer net terms to your clients, even if they pay you on time. After all, much of your cash is entailed in the inventory you front to your clients. When clients are late with their payments, the situation can get even worse.
Companies that still maintain their books by hand have it the worst since it’s harder to gauge their cash flow.
There’s a simple solution: Accounting departments can more easily determine where their cash flow stands at any given time by using cloud accounting tools FreshBooks.
Instead of offering net terms and potentially resulting in cash flow problems as a result, business owners can take advantage of some of the many convenient, online tools that have become available in recent years to handle payments. If you use a cloud-based accounting solution like FreshBooks, you can maximize cash flow in several ways. For example, You can accept online payments, so clients can pay right away. If you choose, you can automate late payment reminders and charge late fees.
Who offers net terms?
Depending on the industry. If the majority of companies within an industry offer net terms, then new entrants are likely to have to do the same in order to compete. Nothing prevents any company from offering net terms.
1. Invoice-based businesses
Net terms are available to any business that bills by invoice rather than upfront. Net terms are standard in your industry, so you have no choice but to offer them. Net terms, if they are not standard in your industry, are generally a plus and can help your business grow.
2. B2B businesses
A business-to-business (B2B) organization sells products and services to other businesses rather than to individuals. Their products or services often help organizations operate or perform certain tasks. As an example, a company might sell a platform for scheduling, monitoring, and analyzing social media posts. Many B2B businesses offer net terms, especially to smaller customers. Net terms provide smaller businesses with greater flexibility in purchasing as they receive more time to pay their invoices. This concept can be used by B2B businesses to reach these clients and increase sales.
A supplier sells goods to businesses in bulk. These goods may be produced by the supplier themselves or acquired from a manufacturer. An example is a food supplier that sells products to restaurants, that use these ingredients to make their meals. Whenever a customer orders in bulk from a supplier, they receive an invoice for the transaction. An invoice might include a net term, like 30 days, giving the customer a deadline to pay.
In net terms, customers have a grace period from the invoice date to pay. This is a great way to attract new customers and grow your business. As a result of implementing net terms, customers will no longer be able to pay immediately.