What does Net 30 Mean? A payment terms guide for small businesses
If you’re a business owner waiting on payments, you’re not alone. According to a 2021 Melio survey, over 50% of entrepreneurs have gotten paid late before.
With bills to pay to keep your small business afloat, chasing down payments is stressful. Encourage on-time payments by adopting Net 30 terms. This period gives clients a reasonable amount of time to gather their payment, and—assuming your business isn’t cash-strapped—it’s short enough to not create cash flow issues. But what does net 30 mean really and should you use it on your invoice? This guide will help you figure it out.
What does net 30 mean?
Net 30 is a payment term that lets a client know they should pay an invoice in full within 30 days of receiving it. These 30 days are calendar days (not business days), so it includes weekends, holidays, and working days. Net 30 is also a form of trade credit because it allows a customer to receive products and services and pay later.
To use this payment period, send an invoice with “net 30” clearly stated. For clients who have little to no knowledge of accounting terms, “net 30” on an invoice may be confusing. Use “due in 30 days” instead.
Put your net 30 terms at the top or bottom of your invoice.
In the invoice template above, you can write net 30 in the “notes” section right beside the total amount due. Also, there is an “invoice due date section” at the top right where you can state the exact date payment is due.
You can even offer a discount to encourage clients to pay earlier than the terms state. It’s a win-win because they get to pay less, and you get paid earlier. But how exactly will you add a discount along with net 30 on your invoice? Net 3/10 30 and net 2/10 30 are good examples.
What does net 3/10 30 mean?
A net 3/10 30 or 3/10 net 30 is an early payment discount of 3% if your customer pays within the first 10 days of receiving the invoice. The “3” is the percent discount, and the “10” is the number of days the discount applies for.
What does net 2/10 30 mean?
Like the net 3/10 30, net 2/10 30 is an early payment discount. This discount is 2% of the total balance and only applies if the customer pays the invoice in 10 days.
Say you sent a $600 invoice with net 2/10 30 terms to your customer on April 2. If the customer pays the full amount between April 2 and April 11, you’ll give them a 2% discount. This discount will bring the total balance down to $588 if your client pays on or before April 11.
Total balance – (Discount % x Total balance) = New balance
Total balance: $600
$600 – (2/100 x $600) = $588
Should I use net 30 on my invoices?
Now that we’ve answered the big “what does net 30 mean?” question, it is important to note that payment terms will not always guarantee that you get paid on time. But clearly stating your net terms improves your chances of receiving payments on time. You’ve set clear expectations for payment (and possibly, offered incentives, too).
A net 30 payment period may attract business because it allows customers to pay later, not sooner. But it can also create cash flow issues by delaying payments. Consider these pros and cons of the net 30 and see if it’s a good fit for your business.
Advantages of net 30 terms
- Encourages prompt payment: By using net 30 terms, you can minimize payment misunderstandings that lead to delays. You may also encourage early payment by adding a discount for invoices that get paid earlier than 30 days.
- Helps build trust: Customers will likely appreciate you for allowing them to pay 30 days after you’ve delivered their work—which may motivate them to refer others to you.
- Supports startups and small businesses: Compared to when you request upfront payment, the net 30 trade credit allows you to cater to all kinds of people and companies—especially startups and small businesses that don’t always have a lot of money lying around.
Disadvantages of net 30 terms
- Can contribute to cash flow problems: If your business is already cash-strapped, offering net 30 terms may not be the best idea. You’ll be under more financial pressure if you have to wait 30 days to get paid by customers.
- Early discounts reduce revenue: If you offer price reductions to clients who pay early, your revenue will be slightly less than if they had paid in full. However, early access to that cash may be more valuable to your business than the marginal increase in revenue.
What are the alternatives to net 30 payment terms?
Net 30 is the most common invoice payment term. But you don’t have to use the same payment terms with all your clients. You can vary them based on trust and consistency. Consider giving net 15 or less to new clients or serial late payers, and extend net 30 or above to trustworthy clients who regularly pay on time. How you vary between payment periods can also be because of how cash-strapped your business is.
Net 10 is a payment term that requires a client to pay in full for your product or service within 10 days of sending the invoice. This short payment term works best for small businesses with less available cash because it allows you to offer fair credit terms while bringing in cash much faster than Net 30 terms.
Net 15 on an invoice shows that a client should pay you in full 15 days from when they receive the invoice. Just like net 10, net 15 is short enough for companies with limited cash flow. Consider using these short terms for late-paying and new customers’ invoices. You’re still trying to build trust with them, so you can’t risk offering longer payment terms.
On an invoice, net 60 means payment is due within 60 days of the invoice date.
As a small business, a 60-day payment period is long and likely to hurt your operations. A net 60 works better for a medium or large business with more available cash. But if you’re a small-business owner and want to use net 60, we only recommend using it with well-known, consistent, and loyal customers.
2/EOM net 45
2/EOM net 45 (or Net 2/EOM 45) is an early payment discount on net 45. By using 2/EOM net 45, you’re offering your customers 2% off an invoice if they pay you by the end of the month. If the client does not pay the net amount they owe by month’s end, they will lose the 2% discount. Then, the full payment will be due 45 days after you issue the invoice.
The 2/EOM net 45 is best for companies and people who don’t need to balance books on a monthly basis and can afford to wait more than 30 days before getting paid.
Should I use late payment interest?
Late fees for overdue invoices discourage clients from delaying their payments. The extra income also gives you a bit of a cushion when you deal with other late payments in the future.
Either way, late fees are good because they get you prompt payment or more payment!
Bill your clients easily with Neat
Ideally, you should send an invoice with clear payment terms to every customer. Neat’s invoicing feature helps you create, send, and manage unlimited invoices. The invoicing software also lets you set payment terms, send payment reminders, and get paid via credit card, debit card, or bank transfer.
March 31st, 2022
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