When small business owners or freelancers create invoices, they normally use one of the most common payment terms: Net 30. Net 30 has become the standard in the business world for many important reasons.
However, that does not mean that it is perfect for all businesses, and in fact it can be quite bad for your business.
To determine how it will impact your business, I’ll look today at what Net 30 is, its advantages and disadvantages, as well as how you can protect yourself from the pitfalls.
What does Net 30 mean?
Net 30 is a payment term that is used for invoices. The ‘30’ in Net 30 means the number of days that the client is allowed to pay the invoice.
Net 30 is actually then a short-term credit that the supplier extends to the client. This is because, while the goods or products have already been delivered, the payment can be delayed up to 30 days afterwards.
In many areas around the world, Net 30 payment is actually default. In fact, in the UK clients are legally obliged to submit payment to their suppliers within 30 days, unless another agreement has been reached.
What are the advantages?
For sellers, you are probably wondering why businesses use Net 30 in the first place. There are quite a few advantages to both the seller and the client.
The primary advantage to Net 30 is that it provides clients with an incentive to buy your products or services. By delaying payment, you are allowing your clients to hold on to their cash for longer.
This is particularly beneficial if your clients are businesses. They get to delay cash outflows which is great for their accounting. If those businesses have better cash flow, they will have greater ability to meet their financial obligations.
What are the disadvantages?
Net 30 provides lots of advantages—depending on the size of your business.
Medium and large-sized businesses get a lot of benefits from Net 30 because they tend to have many clients. The amount of clients and the date of their exact payments allows them to have cash continuously or regularly flowing into their businesses, allowing them to meet their financial obligations.
For small businesses, however, this is not really the case. Small business owners for the most part normally have just a few major clients, and some only have one or two.
What this means is that if the clients don’t pay on time (or continuously delay payment), those small businesses can fall into extremely difficult times.
Another reason why small businesses are at a disadvantage is that many clients are not sure when the 30 days are set to begin. Is it 30 days from the date the invoice is issued?
Or it is 30 days from the date the goods were sent or the services were provided? There are even clients who believe that Net 30 doesn’t begin until they receive payment from their own clients.
In those situations, small business suppliers won’t be able to receive payment until at least 60 days after the invoice has been submitted. It can even be much longer than that.
If you have to wait for payment from your primary client, then you’ll have to keep on extending credit and hope that your client eventually pays you. Beyond that, you could also take your client to court or just cut your losses completely—neither of which is a good option.
Net 30 doesn’t have to be bad
While it has many pitfalls, Net 30 doesn’t have to be bad for your business. Here are some tips you can use to make sure it works for you.
#1 Agree with your client on the time
One of the most important things you can do from the beginning it so tmake sure you and your client agree on when the 30 days will begin.
For most businesses, Net 30 begins from the date the invoice is issued—not the date it is received. So, for example, if you sent a paper invoice along with shipped goods that take a week to get to the client, your client will now only have 23 days to pay.
#2 Use other Net days
Net 30 is the standard, but it isn’t the only invoice payment term. If you want to enjoy the benefits of Net 30 without having to wait that long, you can shorten it to Net 21 or Net 15.
By making the payment term shorter, you can increase your cash flow by getting paid faster.
#3 Charge for late payments
Another crucial thing is to make sure you are charging any customer that pays your invoices late. Net 30 is technically an interest-free short-term credit, but after the 30 days are up, you should make sure to add on a percentage late charge.
You can start with 5% of the total invoice amount for every week or month that the invoice is late.
#4 Use Net 30 only for trusted clients
One more thing you can do is to not apply Net 30 to all your clients. Instead, you should only use it for clients that you have a good, consistent relationship with.
If your clients have paid you on time consistently 3, 5 or more times in a row, then you should extend Net 30 to them. If they are new, then it is probalby best to apply Net 15 payment terms until the relationship has been established.
By following these four steps, you’ll see how effective Net 30 invoice payment terms can be. While they have particular disadvantages for smaller businesses, they don’t have to be detrimental to yours.
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.