5 good reasons to use Net 30 payment terms (or not)

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Business owners can expand their customer base by offering credit terms such as net 30. Are there any benefits to offering net 30, or is it more of a problem than it’s worth? Keep reading to learn more.

One of the most commonly used payment terms, net 30 is a credit term given to your customers requesting that payment be made within 30 days of the invoice date. Although the net 30 can be used with a discount as an early payment incentive, the net 30 is also used without any discount being offered.

Overview: What does net 30 mean?

Are you ready to offer credit terms to your customers? Then you probably want to know more about the net 30.

Net 30 is one of the most common terms of credit used by bookkeepers and bookkeepers and simply means that you extend credit to your customer and expect them to pay the net amount or full amount of invoice within 30 days of the invoice date. .

Although customers may be confused as to when the net 30 hour period begins, it is still based on the billing date.

For example, if Marge sends you an invoice dated September 4, and that invoice has 30 net due dates, that means you will have to pay the net amount or the total amount due by October 3.

If you use accounting software or billing software, you can enter the credit terms you want to use when creating your invoice.

Net 30 versus 30-day maturity: what’s the difference?

In most cases, there is no difference between “net 30” and “due in 30 days” as they appear on an invoice, as both indicate that your customer is responsible for paying the invoice within 30 days. The only time these two terms differ is if you offer a discount with the net 30 terms.

5 Benefits of Using Net 30 Payment Terms

If you’re still undecided about offering credit terms, learning more about some of the benefits of using net 30 payment terms can help you make a decision.

1. Expands your customer base

Offering clear 30-day terms can help expand your customer base significantly, as many customers appreciate the 30-day payment option, especially those who may have their own cash flow issues.

2. Offers a strong incentive to your customers

If you frequently sell to larger companies, you will understand that sometimes getting payment up front or at the time of service is next to impossible.

However, by offering credit terms such as net 30, it is much easier for your customers to submit your invoice through their normal processes and still pay you within the 30 day period specified on the invoice.

3. Allows you to add an early payment discount

One of the most effective ways to get your customers to pay sooner is to offer an early payment discount. If you currently offer your customers net 30-hour terms, but want them to pay a little faster, you can add an early payment discount.

For example, if you want to offer a 2% discount to customers who pay in advance, you can change the billing duration to 2/10 net 30.

Illustration of the discount offered

If you pay an invoice within 10 days, you can take advantage of a 2% discount. Image source: author

This means that if your customer pays within 10 days of the invoice date, they are eligible for a 2% discount. If they choose not to prepay, the invoice is due for the net amount within 30 days of the invoice date.

4. Helps your business stay competitive

It’s hard to compete with other companies in your industry if they extend 30 net terms to their customers and you still insist on an upfront payment. Although not all companies are able to offer credit terms to all of their customers, it can help your business stay competitive.

5. Build customer loyalty

Offering credit terms to your customers can help build both trust and loyalty, and maybe even reward you with a customer for life.

5 Disadvantages of Using Net 30 Payment Terms

While offering net 30 terms to your clients has some distinct advantages, before making a decision, make sure you are aware of the downsides as well.

1. Can create cash flow problems

If you have limited cash, you might want to reconsider offering net 30 terms to your customers. Small businesses with limited cash flow may struggle to wait 30 days for customer payments.

If you think you need to offer credit terms to stay competitive, consider the net 10, which will get you paid much faster.

2. Discounts Create Thinner Profit Margins

If you attach a discount to net 30 terms, your profit margin will become even thinner. Again, if you’re able to squeeze your profit margin a bit in order to get paid faster, then go for it. But, if you’re already working on a very slim margin, discounting invoices might not be a good idea for your business right now.

3. May create extra work

Yes, it takes more work to invoice a customer, post a discount (if applicable), and record a customer payment. You may also be tasked with tracking overdue customers and even managing collections.

If you have the staff and the time to do so, great, but if not, you may be better off continuing with your current payment terms.

4. The terms are unclear

Net 30 terms can confuse customers, who ask the following questions:

  • Does the 30 days start when the invoice is received?
  • Is payment due 30 days from today or 30 days from invoice date?
  • Does the 30 days start when the product or service is received?
  • If no discount is offered, why are the billing terms net 30?

A sample invoice with credit terms and due date included.

You can easily include both credit terms and a specific due date to reduce customer confusion. Image source: author

These are all great questions, and one of the easiest ways around them is to use a due date instead of net 30.

Revisiting Marge above, on the invoice she mailed dated September 4, if she wanted payment by October 3, she could simply use Due by October 3 on her client’s invoice rather than net 30, which eliminates all the above questions.

5. Overdue accounts become a reality

No matter how diligently you do your research, in reality you are going to have delinquent accounts. Laggards create a lot of extra work (see #3) and even with all that extra work, they may never pay. And as a business owner, you have to prepare for it.

FAQs

  • No, you don’t. But you may find that it increases your customer base and helps your business grow. It also helps you stay competitive in the market, especially if your direct competitors offer credit terms to their customers.

  • It depends on a lot of things, such as your current cash flow and whether offering a discount will negatively impact that cash flow. If you don’t want to offer a discount, but want your customers to pay sooner, you can try offering net terms of 10 or 15, or even cash on receipt, if you want to get paid even faster.

  • If you’re not offering your customers a discount, there’s no reason you can’t use a specific due date rather than net 30. This can also help avoid customer confusion for those who don’t know when the 30 days actually start.

Is Net 30 Terms Right For Your Business?

Some small business owners may find that the advantages of offering net 30 terms far outweigh the disadvantages.

However, if you are not comfortable waiting 30 days for payment, you can use net 10 or net 15, but keep in mind that whenever you offer credit to your customers, it is you may not receive payment on time, or at all.

On the other hand, offering credit terms to your customers can help you grow your business and your customer base. If you screen your customers carefully and are selective with whom you offer credit terms, chances are that offering net 30 payment terms could be a wise move for your business.

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