What Are Net Payment Terms & Why Are They Important?

Introduction

It is no secret that businesses run on cash and late payments impact cash flow. But did you know that net payment terms play a crucial role in getting paid and can affect your business’s readily available cash flow? Well, now you do. In fact, one of the biggest issues for the finance department is getting invoices paid on time.

So, what can you do to reduce these late payments? A good start is to set clear payment terms, including discounts, end-of-month terms, or net terms like Net 15, Net 30, Net 60, or Net 90. With that in mind, in this article, we will cover everything about net payment terms so that you can choose the right ones for your business and avoid cash flow issues.

What Are Net Payment Terms?

Net payment terms refer to the agreed-upon period within which a buyer must settle their invoice after receiving goods or services from a seller. They specify the payment deadline as a certain number of days from the invoice date. Usually, the terms offered are 15, 30, 60, and 90 days.

Typically, net payment terms are expressed as “Net X,” where X represents the number of days. So, if a supplier offers the customer’ Net 60′ payment terms, it means that the customer is expected to pay within 60 days of receiving the invoice.

These terms provide clarity and structure regarding when payment is expected, helping both the creditor and debtor plan and manage their cash flows effectively.

Net 15/30/60/90 Terms Explained

Net 15, Net 30, Net 60, and Net 90 are common terms used in business transactions to define the payment due dates after an invoice is issued. Here’s what each term means:

1. Net 15
   

   Net 15 payment terms refers to a payment term in which the buyer is required to settle the invoice within 15 days from the date the invoice is issued by the seller. This term specifies a relatively short timeframe for payment compared to other common terms like Net 30, Net 60, or Net 90.

   
   
2. Net 30
   

   An invoice with Net 30 payment terms indicates that the payment is due 30 days from the invoice date. For example, if a supplier and customer agreed on Net 30 payment terms, the supplier will send an invoice on July 1, 2024, expecting the customer to make the payment on or before July 31, 2024.

   
   
3. Net 60
   

   Under Net 60 terms, the buyer is required to make full payment within 60 calendar days from the date the seller issues the invoice after delivering the goods or services. For instance, if the invoice is dated June 1, 2024, with 60-day payment terms, payment would be due by July 31, 2024.

   
   
4. Net 90
   

   Net 90 payment terms mean that after a seller provides goods or services to a buyer and issues an invoice, the buyer has 90 days to pay the invoice amount in full. It provides a longer payment period compared to shorter terms, like Net 30 or Net 60, allowing buyers more time to manage their finances.

   
   

How Do Net Payment Terms Work?

Net payment terms provide customers with the flexibility to make payments within an extended time period. While most businesses agree on Net 30, these terms can vary based on industry dynamics, business needs, cash flow requirements, and client relationships.

For example, a business in the food and beverage industry may use Net 15 terms due to the fast turnover of inventory, which requires consistent cash flow. In contrast, a supplier in the construction industry may use Net 90 terms due to fewer upfront expenses. This customization ensures both parties can manage their financial obligations effectively, fostering trust and collaboration in business transactions.

Advantages of Offering Net Terms

From streamlining the cash flow in the company to building strong business partnerships, net terms offer several advantages to both buyers and sellers. Let’s take a closer look at these:

1. Better business relationships
   

   Net terms improve business relationships by offering flexibility in payment schedules and accommodating varying financial capabilities and cash flow needs.This fosters trust and loyalty as it demonstrates businesses’ understanding and support for their customers’ operational challenges.

   
   
2. Increased sale opportunities
   

   Allowing customers to buy goods and services on net terms attracts those who prefer buying on credit, expanding the customer base beyond immediate payers. This flexibility encourages larger purchases and repeat business, enhancing sales opportunities and fostering customer loyalty through convenient purchasing options.

   
   
3. Streamlined receivable management
   

   By clearly communicating the payment terms, including the timeframe within which the customer is expected to pay, businesses reduce the confusion surrounding payment timelines. This further makes it easier for accounting teams to collect payments, manage account receivables, and plan and predict budget and outgoings.

   
   

Disadvantages of Offering Net Terms

While net payment terms can offer benefits, they also come with certain challenges for businesses:

1. Chances of delinquent payments
   

   Delinquent payments occur when customers fail to pay invoices within the agreed-upon timeframe. So even if businesses provide their customers with an extended timeline for payment, the customer may still fail to make payment or take a lot longer.

   
   
2. Cash flow disruptions
   

   Businesses relying on net payment terms must wait for customers to honor their payment obligations. This can strain cash flow, especially if there are delays or defaults in payment, as a significant portion of sales is tied up in accounts receivable with extended payment terms.

   
   

Businesses can navigate these disadvantages by implementing strategies such as late fees or discounts for early payment. Companies often set specific terms regarding late payments, typically in the form of late fees.

So, if customers fail to pay within the agreed-upon timeframe, they will be charged a late fee along with the billed amount. Similarly, offering early payment discounts encourages customers to make payments before the deadline. This, in turn, helps businesses prevent the risks of delinquent payments or cash flow disruptions.

How to Choose the Right Payment Terms for Your business?

As mentioned above, net payment terms are not the same for all businesses. Factors like the nature of business operations, industry, credit history, etc., come into the picture when deciding the right payment terms for your business. Below-given are some tips to help you make the best choice that will benefit your business:

1. Analyze your cash flow needs
   

   You must start by understanding your business’s cash flow requirements. This means you must know when your overheads need to be paid. You can use the average period collection formula to estimate the suitable net terms and avoid disrupting smoother cash flows.

   
   

   Average collection period = (Accounts Receivable / Net Credit Sales) x 365 days

   
   
2. Know your industry standards
   

   Research typical payment terms used in your industry. This is because every industry will have different requirements when it comes to maintaining liquidity. Also, aligning with industry norms can make your terms more attractive to customers.

   
   
3. Evaluate customers payment history
   

   You might agree that not all your customers consistently make timely payments. Therefore, when offering flexible payment terms, it’s essential to review the client’s past transactions to assess their reliability in meeting payment deadlines.

   
   
4. Review and adjust terms
   

   As businesses evolve, so do their clientele relationships. You must regularly assess opportunities and consider the competitive advantage that your clients contribute to your business. This will help you determine the potential risk associated with extending credit and minimize bad debts.

   
   

How HighRadius Can Help You Streamline Your Net Receivables?

Establishing stronger relationships is linked not only to delivering valued goods or services but also to offering flexibility in making payments. However, offering different payment terms to different customers comes with the challenge of keeping track of receiving these payments in a timely manner. This is where leveraging AI-driven automation solutions can help your business stay on top of account receivables.

With HighRadius AI-Powered AR Automation Software, your accounting team can save time managing receivables by automating repetitive processes such as invoice generation, payment reminders, and reconciliation. Not only this, but they can also gain valuable insights into customer payment behaviors and trends. This allows your business to anticipate cash flows more accurately and proactively manage potential payment delays or disputes. So, with the help of HighRadius solutions, your business can easily balance between offering flexibility to customers while ensuring that you receive timely payments from them.

FAQs

1. What are net 7 payment terms?

   
   

   Net 7 payment terms mean that the buyer must pay the invoice amount within 7 days from the date of receiving the goods or services. These terms are designed to ensure prompt payment for sellers, facilitating steady cash flow and operational efficiency by encouraging quick turnover of funds.

   
   

2. What are net 14 payment terms?

   
   

   Net 14 terms require the buyer to settle the invoice within 14 days of receiving the goods or services. It strikes a balance between shorter and longer terms, offering businesses a bit more time than Net 7 while still ensuring relatively prompt payment to maintain cash flow.

   
   

3. What is the net 45 payment terms example?

   
   

   Net 45 terms mean the customer has 45 days from the invoice date to pay. For instance, a software company might invoice a client for a project with Net 45 terms, allowing the client over a month to review and implement the software before payment is due.

   
   

4. What is net 20 payment?

   
   

   Net 20 terms stipulate that payment is due within 20 days of the invoice date. This provides a moderate timeframe for customers to manage payments while allowing businesses to maintain steady cash flow and operational stability by ensuring timely receipt of funds.

   
   

5. What is a net 10 payment term?

   
   

   Net 10 terms require payment within 10 days of the invoice date. It’s a shorter period compared to typical terms and is often used for transactions where immediate or quick settlement is expected to facilitate faster turnover of funds while reducing the risk of late payments.