You just finished a fantastic meeting with a potential new client. You’ve decided on the scope of your job, the hourly rate your customer will pay you, and the project’s expected overall cost. You still have one more decision to make: will you offer them a net 30 terms?
But what precisely does net 30 imply? Should you automatically accept net 30 terms?
Here’s everything you need to know.
What Does Net 30 Mean?
When you provide someone net 30 terms, you’re giving them the option to pay you for a good or service up to 30 calendar days after you charge them.
Net 30 is a trade credit term. In other words, when you agree to net 30 conditions, you’re really giving your customers a short-term business loan, similar to what a bank or credit card company does when customers use their credit cards.
You deliver goods and services quickly and use accounts receivable to track the debt people owe you. They’ll refund the debt in 30 days if all goes smoothly.
Net 30 payment terms are one of the most typical invoice payment terms, but you can also provide net 10, 14, 15, 30, and 60 payment terms to your customers.
Benefits of Using Net 30 Terms?
The biggest advantage is that you can take on more clients than if you required quick payment for your goods and services. Small businesses, for example, may not have a large cash reserve, thus offering net 30 trade credit allows you to serve them.
This is why big corporations frequently offer their customers generous trade credit terms—net 30, net 60, and sometimes net 90. They normally have enough cash on hand to survive a client not paying them for 30, 60, or 90 days, and giving longer net terms allows them to cast a much wider net when hunting for new clients.
Why Do Clients Prefer Net 30 Accounts?
In addition to the obvious benefits (more time to pay invoices and manage cash flow), many new firms will establish net 30 accounts with their vendors in order to establish business credit. These “small vendor lines of credit” or credit lines can assist young firms in improving their credit score and gaining access to further financing.
This technique, however, only works if vendors submit their accounts to business credit agencies such as Dun & Bradstreet (D&B), Experian Business, or Equifax Business—which they are not obligated to do.
When Does Net 30 Begin?
Depending on what you and your client have agreed on, the due date in net 30 terms can vary.
The “30” in net 30 could refer to 30 days after the sale, 30 days after the products are delivered to the customer’s door, 30 days after the website you built for them is online, 30 days after the invoice date, or any other period. It all relies on the kind of your company and how generous you are with your customers.
Whatever date you choose, make sure you spell it out in advance in any documents you both sign, using crystal-clear language.
Calendar days are always included in Net 30. (i.e., weekends, holidays, and business days). Make that clear in the contract you sign with your client.
All Businesses Use Net 30?
Absolutely not. The type of business a company operates determines whether or not it uses net 30 terms. Retailers, for example, rarely give credit to their customers. If you want to get an espresso at your neighborhood cafe, you’ll almost always have to pay cash.
Many smaller, non-retail enterprises will also avoid net 30 because waiting 30 days for payment is simply too lengthy for them. They may offer less favorable payment terms, such as net 14, or they may not offer trade credit at all.
Small enterprises in consulting, graphic design, software development, and other service industries will occasionally provide net 30 terms.
Why Should My Business Use Net 30 Terms?
It all depends on how much cash you have on hand, how many clients you have, whether this is standard practice in your business, and, most importantly, how generous you can afford to be with your clients.
Net 30 may help you get more clients if you have a lot of cash on hand, have a lot of diverse clients, and can withstand a few late payments from them.
On the other hand, if you don’t have a lot of cash on hand and rely on just a few clients, giving them net 30 conditions on their payment could cause cash flow issues, especially if they pay late.
When you’re short on cash, it’s tempting to relax the restrictions for extending credit to your customers (also known as your business credit policy)—don’t. The quantity of sales credit you provide your customers and how long you give it to them should be determined by your business demands and how generous you can be.
It can assist to think like a lender in these situations, because extending your credit terms or offering longer payment terms is the same as expanding your clients’ credit limits. Is their payment history sufficient to warrant more favorable terms?
Consider asking for upfront deposits on major orders and include interest for late payments in the contracts you have clients sign if your business is still in its early stages or you haven’t yet created a consistent cash flow pattern. Consider requesting a company credit check on new clients before issuing any trade credit to further reduce risk.
When a new client signs up and sees these terms, they’ll realize how serious you are about getting paid on time. After all, nobody enjoys paying a late charge.
So How Do I Get Started With Net 30?
If net 30 seems like the best option for your company, all you have to do now is write it into your contracts and make sure your next client understands it before you start the project. You’re officially up and running on net 30 if they agree and sign the contract.