Net 30 Payment Terms

net 30 payment terms

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Net 30 is a short indicator used on invoices (bills) informing the recipient that they have a period of 30 days to pay the balance. 

What Are Net 30 Payment Terms?

A vendor that has an existing business relationship with a customer often establishes net terms, which allows the buyer some time to pay. Often, the buyer will formally place an order with a vendor for goods or services using a purchase order. 

Next, the vendor will send the buyer an invoice confirming the order and indicate the payment terms. 

Net 30 simply means that the buyer has 30 days to submit payment for the order. In a business-to-business relationship, invoices are often generated by the vendor’s accounting department.

In these relationships, invoices often also contain the terms accounts payable (AP) or accounts receivable (AR). 

The term “AR” refers to any outstanding balance owed to the vendor or supplier, which is listed on a company’s balance sheet as an asset. AP or simply “payables” also refers to an unpaid balance, which is listed on a company’s balance sheet as a liability.

AP and AR are also terms that refer to the division or department of an organization that is responsible for submitting invoices or for paying invoices. For example, a vendor might address an invoice to the attention of the accounts payable department.

What Does It Mean on an Invoice?

Net 30 is a term used to communicate that the recipient has 30 days to pay an invoice. Other net terms examples might include net 10 for 10 days, net 60 for 60 days, etc.

Net 30 is short for what might read, “Payment is due within 30 days of the date specified.”

After a vendor sends an invoice, the amount is generally allocated as an account receivable. After the vendor receives payment for the invoice, the entry is typically transitioned to a cash account.

For the purposes of reporting, many accounting departments generate accounts receivable aging reports. This report generally consolidates all “open” or unpaid invoices and lists them according to the due date.

The account receivable aging report is one tool used for evaluating and monitoring a company’s cash flow. 

The report also makes the vendor aware of any “overdue” or “past due” invoices that have exceeded the 30-day period. Here, a vendor will usually follow up with the buyer’s accounts payable department to collect the past due balance.

When Do Net 30 Terms Start?

Net 30 accounts have a payment deadline of 30 days, beginning from the invoice date. Often during this 30-day period, the ordered products are shipped to the buyer. For example, an invoice dated April 1 would be due to be paid in full on April 30.

Net terms typically include all calendar days regardless of whether they include holidays, weekends, or business days. Other less common variations might include 30 days from the date the order was placed or 30 days after the product is delivered.

In some instances, vendors will provide incentives for customers to pay sooner. For example, an invoice might read 1%/10 net 30. Here, the buyer is eligible for a 1% discount if the invoice is paid in full within 10 days.

Another lesser-used potential variation used on invoices is net 30 EOM. An invoice containing net 30 EOM terms is due on the 30th day of the following month. For example, an invoice dated April 15th would be due on May 30th

Advantages of Using Net 30 Terms

Businesses offer invoice payment terms to customers for a variety of reasons. Among the leading reasons for extending net 30 terms involves attracting (acquiring) new customers.

Let’s consider an example using a home improvement contractor who must order supplies to begin a project that takes roughly two weeks to complete. In many cases, the homeowner (customer) will not pay the contractor until the project is complete. 

Here, the contractor cannot start the work until he has ordered and received the materials needed. Having 30 days to pay the supplier of materials is clearly a viable benefit.

We know that customers usually have options when choosing vendors. Offering net terms may represent an excellent way of attracting new customers, bolstering sales, and differentiating yourself from your competitors. 

In certain industries where invoice payment terms are the norm, not offering them might prove very detrimental.

Offering net terms also allows for adding incentives to pay the invoice sooner. For example, the billing terms might read 2/10 net 30 or 2%/10 net 30. Both of these net terms indicate that the buyer can get a 2% discount on the invoice if they pay within 10 days.

Offering net 30 terms might also build loyalty with your buyers. Many buyers will perceive invoice payment terms as a sign that the supplier trusts and respects them.

Another potentially overlooked benefit is that offering net terms might allow for selling products or services at higher profit margins. 

For example, a customer might choose a supplier that sells a commodity at slightly higher prices because of the extended payment terms. Also, loyal customers are often less likely to “shop around” for the best price on each and every item too.

If your business accepts credit cards as a form of payment, a customer might actually enjoy a lengthier repayment term. 

For example, if the invoice dated April 15 is paid on May 15 with a credit card, then the customer might potentially have a subsequent 30 days (June 15) to pay the credit card balance.

Disadvantages of Using Net 30 Terms

One of the primary disadvantages of offering net 30 payment terms is that some customers will actually take more time to pay–such as 35 to 40 days. 

In the meanwhile, vendors must conduct time-consuming measures to collect the balance, such as making phone calls, sending emails, etc.

One critical downside to not requiring immediate payments is potential cash flow problems. You will likely need to “fund” your accounts receivable, which could require a line of credit or securing more favorable credit terms with your suppliers.

Aside from struggles associated with the delay in receiving payment, you could encounter bad debts if customers do not pay. For this reason, your business should perform proper due diligence before selling to a customer on credit terms to evaluate their creditworthiness. 

Keep in mind that if the prospective customer’s order is time-sensitive, you may run the risk of losing out on an opportunity to establish a new, ongoing business relationship.

Steps to Consider Before Extending Credit to Customers

Consider implementing some of the following best practices to help limit financial risk:

  • Establish a process or policy: Create a formal written credit policy and a credit application. The credit application should capture key data including the tax ID number of the business, banking information, and trade references.
  • Check trade references: Contact the trade references provided regarding their business relationship with the company.
  • Perform a credit check: The three primary sources for accessing business credit bureau reports are Dun & Bradstreet (D&B), Equifax, and Experian. Unlike consumer credit scores that range from 300 to 850, business credit scores typically range from 1 to 100. Data from Experian breaks down the credit score range as follows:
High RiskMedium to High RiskMedium RiskLow to Medium RiskLow Risk
1 – 1011 – 2526 – 5051 – 7576 – 100
  • Choose credit terms and limits: Based on your assessment of the potential customer’s creditworthiness, select an initial credit limit that you are comfortable with and that seems reasonable. Assuming that the customer makes timely payments, credit limit increases are possible.

Are Net 30 Terms Right for My Business?

You must weigh the advantages and disadvantages of offering net terms. You will need to consistently manage your cash flow as you await payments on invoices. This is not an unusual concern, as roughly 60% of small businesses “struggle” with managing their cash flow.

Several potential short-term financing options exist that can assist small businesses with maintaining a positive cash flow. For example, you might consider a business credit card to help cover some expenses.

Another option is establishing a small business line of credit, which is a form of revolving credit that allows you to draw on funds as needed up to a predetermined limit. 

Lines of credit are offered through a variety of banks, credit unions, and online lenders with differing qualifications, rates, and terms; therefore, be sure to explore your options.

Another financing option is invoice factoring, which is a form of alternative financing which might represent an option for those unable to secure more conventional types of funding. 

Here, you “sell” your payables (invoices) at a discount and receive a cash sum. The percentage of the discount, or factoring fee, usually ranges from 1 to 5%. 

Lenders often provide the borrower an advance of between 80 and 90% of the amount of the invoice immediately and the remainder (minus the fee) after your client pays the invoice.

Consider the following example:

Invoice amount: $5,000
Fee: 3%= $150
80% initial advance = $3,880
Remainder (net amount) = $970

Consider adopting technology for managing your client invoices. For example, promptly send your invoices electronically, use automated email payment reminders as due dates approach, and have an easy-to-use, online payment method for receiving customer invoice payments.


What Does ‘3/10 Net 30’ Mean?

With terms of 3/10 net 30, the invoice is due to be paid in full within 30 days of the invoice date. However, as an early payment option incentive, a 3% discount is available if the full amount is paid within 10 days. 

Here, the vendor or supplier is seeking to expedite payment of the invoice to better manage their cash flow.

How Do 1/10 Net 30 Payment Terms Work?

With terms of 1/10 net 30, the customer is incentivized by a 1% discount on the invoice if it is paid within 10 days. 

Otherwise, the total invoice is due within 30 days of the invoice date. Buyers who are effectively managing their cash flow can capitalize on a discount opportunity through an early payment. 

Do I Have to Offer My Customers Credit Terms?

Vendors have no obligation to offer their clients credit terms; yet, not doing so might put you at a disadvantage in competing with your competitors. 

When vendors offer payment terms such as net 30, they must ensure that they have ample funds on-hand or some means of short-term financing for paying interim expenses as they await payment. 

Further, offering credit terms creates risks associated with customers that pay late or do not pay at all (bad debt). 

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