Glossary
15 Jan 2025

What are Net Terms and How Do They Impact Your Business?

Subhasis Sahoo (Founding Member - Marketing)

Net Terms Definition :

Net terms refer to the payment conditions set between a buyer and a seller, outlining the period within which the buyer is expected to pay for goods or services after receiving an invoice. These terms are typically expressed as “Net 30,” “Net 60,” or “Net 90,” which indicates the number of days the buyer has to pay the full invoice amount. For example, “Net 30” means the buyer must pay the invoice within 30 days of receiving it.

Net Terms Definition :

  1. Net Terms Definition :
  2. The Different Types of Net Terms
  3. Benefits of Using Net Terms for Businesses
  4. The Risks Associated with Net Terms
  5. Best Practices for Managing Net Terms Effectively
  6. How to Set Appropriate Net Terms for Your Business
  7. Legal Considerations with Net Terms
  8. Conclusion

The Different Types of Net Terms

  1. Net 30, Net 60, Net 90:
    These are the most commonly used net terms, specifying payment due in 30, 60, or 90 days from the invoice date. For example, a business selling to another company on Net 30 terms expects the buyer to pay the full invoice amount within 30 days.
    Example:
    A software provider issues an invoice on January 1st with Net 30 terms. Payment is due by January 31st.
  2. Net 15, Net 45, Net 120:
    These are used less frequently but still serve specific purposes depending on the agreement between businesses.
    Example:
    A manufacturing company might offer Net 45 terms to allow clients more time for payment after large orders.
  3. Discount Terms (e.g., 2/10 Net 30):
    This term allows the buyer to take a 2% discount if the invoice is paid within 10 days. Otherwise, the full amount is due in 30 days. Offering early payment discounts can encourage quicker payments and improve cash flow.
    Example:
    A business offers a 2% discount if the invoice is paid within 10 days (2/10 Net 30). If the invoice is not paid by the 10th day, the full payment is due by the 30th.

Benefits of Using Net Terms for Businesses

  1. Improved Cash Flow:
    By establishing a clear payment schedule, businesses can predict cash flow, allowing for better financial planning and budgeting. Net terms give businesses a structure to ensure timely payments without having to chase clients constantly.
  2. Strengthened Customer Relationships:
    Offering net terms can enhance customer satisfaction by providing them with flexible payment options. In turn, this strengthens relationships and can lead to repeat business.
  3. Attracting More Clients:
    Offering payment terms such as Net 30 or Net 60 can attract more clients, especially those with limited upfront capital. Flexibility in payment terms can make a business more competitive in a crowded market.

The Risks Associated with Net Terms

  1. Late Payments:
    One of the primary risks associated with net terms is the potential for late payments. If clients fail to meet the agreed-upon payment deadlines, businesses face cash flow challenges, which may affect their operations.
  2. Impact on Accounts Receivable (AR):
    Managing overdue invoices requires additional time and resources, placing a strain on the AR team. This can also lead to higher administrative costs if payment reminders and collections are necessary.
  3. Credit Risk:
    Offering net terms to new or unverified clients can lead to financial risk if the buyer fails to pay. To mitigate this, businesses should assess the financial health and payment history of customers before extending credit.

Best Practices for Managing Net Terms Effectively

  1. Clear Communication:
    Clearly state net terms in all invoices and contracts to avoid confusion. The terms should be straightforward and unambiguous to ensure both parties are on the same page.
  2. Incentivize Early Payments:
    Offering early payment discounts (e.g., 2/10 Net 30) can motivate customers to pay faster, improving cash flow. Businesses should also consider using tools that automate the calculation of discounts for early payments.
  3. Automate the AR Process:
    Automating accounts receivable processes can reduce errors, ensure timely follow-ups, and improve efficiency. Tools like Bill.com and QuickBooks can integrate invoicing, payment tracking, and reminders in one platform.
  4. Regular Follow-Ups:
    Set up a reminder system for clients who haven’t paid by the due date. Consistent follow-ups show professionalism and keep clients accountable. Having an automated system can reduce human errors in tracking overdue invoices.

How to Set Appropriate Net Terms for Your Business

  1. Assess Your Cash Flow Needs:
    Consider your financial requirements when setting net terms. If your business needs more immediate cash flow, shorter payment terms like Net 15 or Net 30 might be ideal. Longer terms like Net 60 or Net 90 are more suitable if your cash flow allows flexibility.
  2. Considering Your Customer’s Financial Health:
    Before extending net terms to new clients, assess their payment history and financial stability. For businesses with a solid financial standing, offering longer payment terms might be appropriate, but for newer clients, shorter terms might reduce the risk.
  3. Industry Standards:
    Check what payment terms are commonly used in your industry. For example, B2B suppliers may typically offer Net 30 or Net 60 terms, while industries like construction may see longer terms due to the size and scope of projects.

  1. Contracts and Agreements:
    Always ensure that net terms are documented in formal contracts or agreements to avoid legal issues down the line. Clearly outline the payment terms, consequences for late payments, and any discounts or penalties.
  2. Dispute Resolution:
    Include dispute resolution clauses in your agreements. These clauses define how payment issues will be resolved and can help prevent conflicts over net terms.

Conclusion

Incorporating net terms into your invoicing strategy can significantly improve cash flow management, strengthen relationships with clients, and make your business more competitive. However, it’s essential to balance flexibility with caution by assessing clients’ creditworthiness and using best practices to manage overdue payments. Implementing clear communication, automation, and incentivizing early payments can streamline the management of net terms and reduce the associated risks.