Receiving payments in full and on time is essential to the continued success of your business and, while you may not be a qualified accountant, it is vital to grasp the basics of invoicing for the smooth running of your enterprise.
The most common term in this context is net 30 invoicing, whereby you expect the buyer to make the payment in full within 30 days of the date on which the transaction occurred. This is also the basis of several other invoicing terms, such as net 60 and net 90. Familiarising yourself with these terms can come in handy when recovering your dues from customers.
What is Net 30?
A net 30 invoice is a form of short-term credit that you provide to your client for services that have been rendered or a job that has been completed. This 30-day period includes the transit or shipping time required for the product to reach your customer. It is often a preferred option for small businesses and freelancers because it offers an incentive for the client to pay up faster, as they can avail a discount (see below). This translates into timely cash flows.
'Net 30' versus 'Due in 30 Days'
While these two terms appear to be the same, this is far from the truth. When an invoice is due in 30 days, this means that the payment is due 30 days from the date of the transaction. If the invoice is net 30, though, it indicates that while the payment is also due in 30 days, the customer can avail a discount if payment is made before then. In this case, net 30 is the amount owing in full, after factoring in discounts and deductions.
Advantages of Net 30
There are significant benefits to using the net 30 payment system, such as:
- Acting as an incentive for clients to use your product or services. By giving them nearly a month to pay their dues, you are offering your customers breathing space – similar to the way that credit card transactions work. However, unlike credit cards, a key plus point for clients here is that this credit is interest-free.
- The possibility of getting a discount for early payment is also lucrative to most. It is also beneficial to you as you will get paid earlier, potentially preventing cash flow issues.
- Offering a net 30 invoice also helps you bond with your clients as it is a way of showing them you trust them enough to wait for payment.
Disadvantages of Net 30
Along with the advantages of net 30, there are some disadvantages that you need to be aware of. For instance:
- Your cash flow can get obstructed if clients default on payments or keep you waiting for too long. As a small business, it's understandable that you might want to offer special privileges or favours in order to retain your clientele, but some customers can abuse this leniency and cause you problems.
- Offering net 30 invoicing can be a massive risk if it is to a new client because you do not know for sure if they are able to pay you.
- The client might have a different interpretation of what net 30 means and think that the payment is due thirty days from the date the invoice is issued (or even the date that they receive it).
So, Should You Use Net 30 Invoicing?
With all of this in mind, there are certain elements that you should think about before deciding to choose this method of invoicing. Consider the following before you decide:
- If you do not foresee any cash flow issues, then it might be a suitable option. However, if payment delays are going to adversely affect your business, by stalling projects or expansions, then it is probably not for you.
- If your clientele is large, then you can likely afford a few late payments every month. If not, then it is best to steer clear of net 30.
- If yours is a service-based business and you have minimal overhead, then offering net 30 might help you stand apart from the rest and boost competitiveness.
- If you have reliable clients with varied buying patterns, you can also offer tiered invoicing. Here, you can seek immediate payment when the total amount due is below a certain threshold and extend net 30 benefits when the amount is substantial.
Other Common Payment Terms
Aside from net 30, net 60 and net 90, there are some other standard payment terms in use. While net 60 sets the payment due date at sixty dates (or two months), net 90 gives the client 90 days (or three months) to clear their dues. These payment plans are more suited to larger businesses who can afford to wait for payments for more extended periods.
Here are some other viable alternatives:
X/10: With 1/10 net 30, the client gets a 1% discount for making the payment in ten days. Similarly, 2/10 net 30 offers a 2% discount to clients who clear dues within ten days. If not, the full payment must be made within 30 days with no discount applying in such circumstances.
Net 7 or 10: Net 7 gives the seller a seven-day credit to clear their invoice, while net 10 provides the client with ten days to pay all dues. These are unusually short credit extensions that are not very commonly used.
Cash on Delivery: Cash on delivery is popular with sellers and buyers alike because the client has to pay up only when the goods are delivered. Here, most of the risk is for sellers as customers can refuse to accept the delivery, which will then be returned at the seller's cost.
Cash in Advance: When cash in advance is the mode of payment, the risk is the client's as the payment is made in full before the products are shipped or services rendered.
Cash Before Shipment: In cash before shipment, the customer has to pay after ordering the goods (and before they are sent). Here, the risk is again more significant for customers.
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Ultimately, when compared to the alternatives, net 30 often emerges as the most popular means of invoicing. It is all about establishing trust with clients and forging an excellent long-term bond. Achieving the right balance is key to making net 30 work to your benefit without losing clients.
Was this article helpful? Do you use net 30, or do you prefer another means of invoicing? Let us know your thoughts in the comment section below.