Net payment terms are conditions outlined on invoices that specify the time frame within which a payment must be made. Commonly expressed as “net 30,” “net 60,” or “net 90,” these terms indicate that full payment is due within 30, 60, or 90 days, respectively. Net payment terms help businesses manage cash flow and make sure both sellers and buyers understand when payments are expected. Different industries or companies might set different standard net terms based on their operational needs and the nature of their relationships with customers.

Below, we’ll cover commonly used net terms, the pros and cons of offering them, digital platforms for managing net terms and invoicing, and best practices for managing net terms as a small business.

What’s in this article?

• Commonly used net payment terms
  
• Net payment terms vs. credit cards
  
• Pros and cons of offering net payment terms
  
• Digital platforms for managing net payment terms and invoicing
  
• Best practices for managing net payment terms as a small business
  

Commonly used net payment terms

Net payment terms establish when a payment is expected after an invoice is issued. Different variations provide different levels of flexibility and security for both parties, reflecting the balance of power in business relationships, the trust level, and the financial strategies of the companies involved. Sometimes, businesses might negotiate custom terms that suit the specific needs of both the buyer and the seller, such as seasonal payment schedules or milestone-based payments for project work.

Here’s a look at some commonly used net terms.

• Net 30: Payment is due within 30 days of the invoice date. Net 30 is frequently used because it provides enough time for the buyer to assess the goods or services without excessive delay in paying the seller.

• Net 60: Payment is due within 60 days of the invoice date. Net 60 might be used for larger purchases or in industries where longer projects are common. This can allow payers more time to gather the necessary funds, especially if their revenue is cyclical or tied to specific project milestones.

• Net 90: Payment is due within 90 days of the invoice date. These terms are less common and typically used in industries where large-scale projects or bulk purchases are the norm. This extended period helps buyers manage large amounts of capital outflow, and it aligns payments with broader financial planning and budgeting cycles.

• Net 10 or net 15: Payment is due within 10 or 15 days of the invoice date. Some businesses might offer shorter terms such as net 10 or net 15 if they need to accelerate cash flow, or if the goods or services provided are quickly consumed or resold.

• Staggered payments: Some businesses negotiate staggered payments under terms such as net 30/60/90, which allows partial payments over multiple intervals. This can help manage large invoices, providing the buyer flexibility while ensuring the seller is paid on a defined schedule.

Net payment terms vs. credit cards

Net payment terms and credit cards both offer ways to purchase goods or services up front while paying off the balance at a later date. Here’s how these two credit options compare.

Net payment terms

The buyer receives goods or services and is given a set period (e.g., 30 days, 60 days) to pay the invoice in full. Net terms are generally used between businesses, not for consumer purchases, and sellers might assess the buyer’s credit before extending net terms.

Net payment terms carry these benefits:

• Buyers can use the purchased goods or services to generate revenue before payment is due.

• Unlike credit cards, there’s typically no interest charged on net terms (although there may be late fees for late payments).

• Paying off invoices according to net terms can promote trust and goodwill between businesses.

• Terms are often negotiable and can be customised to suit both parties.

Credit cards

The buyer pays for goods or services immediately using a credit card and repays the credit card company later, likely with interest. Some cards have annual fees, late fees, or other charges, and spending is capped by the card’s credit limit. If not paid off in full each month, credit card debt can accumulate quickly due to high interest rates.

Credit cards can offer the following benefits:

• Credit cards are widely accepted and easy to use for both business-to-business (B2B) and business-to-consumer (B2C) transactions.

• Many credit cards offer cash back, rewards points, or other incentives.

• Some cards provide insurance or fraud protection on purchases.

Pros and cons of offering net payment terms

Businesses can decide whether to offer net terms by considering their cash flow, relevant industry standards, the financial reliability of their customer base, and their administrative capacity to manage credit. For some businesses, the potential increased sales and competitive positioning facilitated by net terms might outweigh the risks and costs involved. For others, the risks might be too great.

Here are the pros and cons of offering net terms.

Pros

• Increased sales: Businesses can use net terms to attract customers who might not have the capital to pay immediately. This can be particularly effective in industries where purchases are large or in bulk.

• Competitive edge: In competitive markets, flexible payment terms can distinguish a company from its competitors. If two companies offer similar products or services, the one with more favourable payment terms might generate more business.

• Customer loyalty: Providing net terms can build trust and goodwill with customers. It shows the seller is willing to support the buyer’s business operations, which can lead to repeat business and long-term relationships.

Cons

• Financial velocity: The lag between making a sale and receiving payment can stress the company’s financial resources, especially if the cycle of outgoing expenses (such as payroll, rent, or supplies) remains constant. This might require using lines of credit or loans to cover short-term financial needs, potentially increasing the business’s debt levels.

• Risk of default: Extending credit increases the risk of payment default. Customers might delay or fail to make payments due to financial difficulties, mismanagement, or unforeseen circumstances, which could result in losses for the seller.

• Resource allocation: Managing net terms requires resources for billing customers, tracking invoices, and collecting payments, as well as potentially following up on late payments or making collections. This administrative overhead requires time and resources that could be spent on other business areas.

Digital platforms for managing net payment terms and invoicing

Digital platforms such as Stripe have transformed the way businesses manage net terms and invoicing. Stripe offers the following tools and features that can simplify the invoicing process and management of net terms.

• Invoice creation: Stripe has an invoicing system that businesses can use to create professional invoices with customisable payment terms – including flexible net terms that can help support their cash flow needs and customer relationships.

• Automated reminders: Stripe can send automated payment reminders to customers, encouraging timely payments without added administrative work.

• Payment processing: Stripe can process payments with several methods, including credit cards, debit cards, and ACH transfers – allowing businesses to support different customers’ preferences and increasing the likelihood of successful payments.

• Reporting and analytics: Stripe provides detailed reports and analytics on invoice payments, allowing businesses to track their financial performance and identify trends. This data can be used to make informed decisions about credit policies and payment terms.

Best practices for managing net payment terms as a small business

Here are some best practices for managing net terms as a small business.

• Define terms up front: Clearly communicate your payment terms to clients before work begins. This includes specifying the net terms (e.g., net 30), the due date, any late payment fees, and payment methods accepted. Document this in your contracts or agreements.

• Offer multiple payment options: Accept a variety of payment methods (e.g., credit cards, ACH transfers) to make it easy for customers to pay you.

• Incentivise early payments: Consider offering a small discount (e.g., 1%–2%) for early payments.

• Consider a late fee policy: A reasonable late fee (e.g., 1.5% per month) can incentivise timely payments. Clearly state your late fee policy in your terms.

• Invoice promptly: Send invoices as soon as the work is completed or the product is shipped. The sooner you invoice, the sooner you can expect payment.

• Track aging invoices: Regularly review your accounts receivable to identify overdue invoices and prioritise collections efforts accordingly.

• Follow up on late payments: Start with a friendly reminder email or phone call, and escalate if necessary. If all else fails, consider using a collection agency or legal action as a last resort.

• Review and adjust: Regularly review your payment terms and adjust them based on your cash flow needs, industry standards, and customer relationships.