Net 30 is a term used for payment purposes between a buyer and a seller. On an invoice, the ‘net days’ show that when the payment is due, we say that 30 days here are taken as 30 calendar days not working or business days.
‘Net’ in its exact meaning is; the total amount payable after all discounts are deducted from it.
Today we will be talking about Net 30, all about it. People starting new businesses or the ones who are new to these terms get confused when they hear such terms. Invoices include such terms commonly but don’t worry, and you don’t have to be an expert in Finance to know about it.
What is the Meaning of Net 30, and how is this term used? How is Net 30 applicable? Is net 30 beneficial for my business? We’ll help you out with all of these questions in your mind in the next part of this article.
In this article, we’ll cover:
- What does Net 30 mean and its use?
- When is net 30 applicable?
- Is Net 30 beneficial for businesses?
- Disadvantages of Net 30
- What are the alternatives to net 30 terms?
- Do I Need Net 30 to Remain Competitive?
- Get started with a net 30
What does Net 30 mean and its use?
An invoice (payment receipt) is given to the client/buyer by the seller, where if net 30 is written, the client has to make the full payment within 30 days’ timespan. E.g., a person purchases some material on the 1st of March and receives an invoice for net 30 written on it, which refers to the fact that he has to pay till the 30th of March.,
Some of the basic terms used along with net 30 are net 10, net 15, net 20, net 60, etc.
Net 30 is a contract of agreement between the two parties (buyer and seller) for payment within a 30 days time span after the seller has performed the service of giving the material to the buyer.
- Net days are used in terms of invoice by business to show the client when the payment is due. You don’t need to be an expert to know these terms but it is essential to know about them when you are running a business.
- Net can also apply to the total due on an invoice. The net value of goods or services itemized on an invoice is their value before tax or other fees. The net value tells the customer or client how much they’re paying for an item or service before tax.
- Net 30 also means that a credit term discount by the seller could be applied if stated between two parties or else after 30 days of invoice issued, full payment is then required.
When is net 30 applicable?
We cannot precisely say when net 30 starts or is applicable, as it depends on the two parties (buyer and seller) for how they decide it to be. It could be considered in many ways like:
- When the client receives the invoice, net 30 could then be started as per 30 days or;
- Thirty days after the sale of goods or services has been performed, etc.
It depends upon the nature of your business and how your client wants it to be.
Is Net 30 beneficial for businesses?
- Usually, large businesses use net 30, net 60, or net er to benefit from handling other work and gain more clients. Large businesses have plenty of cash in hand, and that’s why they could go for more significant net days for payment.
- Small businesses use smaller credit terms such as; net 10, net 15, net 20, and not more than that because it could result in loss. E.g., if you buy a cup of cappuccino from a coffee shop, then the net 30 term of payment is not applicable at all, as it requires an immediate mode of payment.
Bigger companies/large businesses could easily handle a little delay in payments by their clients as they have a vast number of already existing clientele. But when we compare small businesses, it’s a different matter as if you have only 2 or 3 clients; then this term could not be used.
Therefore, net 30 could be beneficial/advantage for large businesses/companies but a disadvantage for small businesses.
Disadvantages of Net 30
The disadvantages for Net 30 payment terms depend on what your business size is.
If you have a good-sized business (for example, medium-sized or larger), you will have enough cash inflow to stave off any of the negatives associated with net 30.
With many resources and revenue streams, those types of businesses have enough incentive to keep their clients on net 30 payment terms.
However, for small (or micro) businesses and freelancers, net 30 can be a trap. One important thing to consider is that clients may have differing opinions of what net 30 actually means.
Some may believe that the 30 days begin from the date the invoice is received. Others may think it is from the date the invoice is issued, while you (and others) may believe it starts when the work was completed or the goods were delivered.
A Net 30 disadvantage is that sellers may have to wait long before their invoices are paid due to confusion of the start date Beyond that, especially for freelancers, net 30 could even mean the period begins after your client has invoiced their client. This happens a lot, and often so without the supplier’s knowledge.
With short-term credit extensions, small/micro businesses and freelancers are in danger of not having enough leverage to have their invoices paid.
This means that they will have to continually extend credit, in such a way that net 30 can become a net 60, 90, or even net 365.
Therefore, these smaller businesses can get stuck in a trap of having to work for essentially no pay for possibly a long time.
What are the alternatives to net 30 terms?
You don’t have to offer net 30 terms, and many smaller businesses choose not to do so because it’s simply too long to wait to get paid. If you want to enforce faster payments, net 7 or net 15 might be a better option. On the other hand, if you’re happy to offer more generous payment terms to your clients, think about offering net 60 or net 90 terms.
What does 2/10 net 30, 5/10 net 30, etc., mean?
- When the term 2/10 net 30 is used for payment in the invoice, a 2% discount will be given on the total amount. If the client hands out the payment ten days after the invoice is issued or after the services/goods are sold of 30 days.
- The same is the case in 5/10 net 30, where a 5% discount will be given if the buyer gives the payment within ten days instead of a 30 days time span.
Net 10 term:
Like net 30 as described above, net ten is similar, only the days for the payment to be done are less and are ten days timespan. The payment is made after ten days of services or goods have been sold.
Small businesses use this term if their client cannot pay the amount at the moment. The seller then gives time to the buyer to pay the invoice.
Net 15 term:
Net 15 term of payment is used for the buyer who can pay the invoice in 15 days. The buyer/client is given 15 days to pay if they cannot pay at the moment.
Vendors do not commonly use net 15; preferably, net ten or net 20 are used. It depends on the nature of the business.
Do I Need Net 30 to Remain Competitive?
While some companies and freelancers out there have a negative view on net 30 payment terms, it can give you some leverage if you’re looking to work with larger clients.
Like we mentioned earlier, it’s pretty commonplace for large established businesses to request net 30 payment terms because it aligns with their cash flow and accounting cycles.
Plus, you have to keep in mind that you’re probably one of many vendors they’re working with. If they’re being invoiced by 30 different freelancers and clients all at the same time, it could potentially mess with their budget and other expenses.
While it’s definitely a nice option to offer, it’s not a necessity. Especially if you can’t afford to wait a full 30 days, or worse, risk not getting paid on time.
On the flip side, if you’re offering a service-based business without a lot of overhead, offering net 30 payment terms can be a unique selling point. Since a lot of small businesses and freelancers don’t provide this option, it’s a good way to stand out.
Get started with a net 30:
You can quickly get started with net 30 by mentioning it in your upcoming contracts and discuss it with your clients before beginning the project, so there may be no issue. Once you get a green signal from your client, then start working on it!