What Does Net 30 Mean?

Net payment terms are a type of trade credit that gives a customer a set window of time to pay for a service or product. When a supplier and a customer agree to net 30 terms, the customer must pay for the goods they received within 30 calendar days of the invoice date, delivery of the goods, or some other set criteria.

Thirty days is the most common time frame suppliers adhere to, but other net terms are also used. Some industries may use net 60 or net 90 payment terms, meaning the buyer has 60 or 90 days to make a payment, respectively. Other terms may only allow for 15 days or less.

Variations of Net 30 Payment Terms

Sometimes businesses will offer more specific payment terms than just a deadline. For example, 3/10 net 30 payment terms mean the buyer will receive a 3% discount if they pay within a 10-day period. These types of discounts can have many variations, but the calculations are the same:

• 1/15 Net 30: The buyer receives a 1% discount if they pay within 15 days.
• 2/10 Net 30: The buyer receives a 2% discount if they pay within 10 days.
• 3/10 Net 30: The buyer receives a 3% discount if they pay within 10 days.

To calculate the value of the discount, simply multiply the full amount of the purchase by the noted discount percentage. So, a 3/10 net 30 payment term on a $10,000 purchase would equal a $300 discount.

3% x $10,000 = $300

In this example, the buyer would only pay $9,700 for the goods with an early payment.

Pros of Using Net 30 Payment Terms

Net 30 payment terms are one of the most popular ways suppliers charge clients due to the number of benefits they offer.

It Can Give Your Business a Competitive Edge

For businesses that have a product that is hard to distinguish from competitors’ products, offering flexible payment terms can help them stand out from the crowd. A buyer will likely choose to do business with the supplier that is less rigid with their demands and rewards customers who pay early.

It Makes Your Offerings More Accessible

Many buyers appreciate 30-day terms because it gives them the opportunity to pay for the goods with the revenue they’ve made from their own sales. If a buyer has narrow cash flow margins, they might not be able to pay for the goods upfront. Or, the buyer uses the product in such small increments that they need the extra time to make their money back for the purchase.

In those situations, the buyer wouldn’t be able to do business with a supplier that requires payment upfront, driving the need for net terms.

It Instills Customer Loyalty

Another benefit to using net 30 terms is that it shows suppliers place trust in their customers. A working relationship that operates with a healthy degree of good faith will likely last for a longer amount of time than one that is strictly transactional and only focused on the bottom line.

Cons of Using Net 30 Payment Terms

Benefits aside, net 30 payment terms present some notable risks suppliers need to be aware of.

It Complicates Cash Flow

Just as a buyer might run into cash flow problems, suppliers can run into the same problems. J.P. Morgan estimates that small business wholesalers only have 23 cash buffer days on average.

If your business has a thin cash flow margin, you may find it difficult to wait for that extended payment term while operating as normal. This is especially common with small businesses, making it that much more difficult for them to compete against larger organizations.

It Can Lead to Confused Customers

If a buyer is unaccustomed to delayed payment terms, they may not understand when exactly their payment is due. This can lead to honest payment mistakes that sour the relationship, or it can create more work for your team in explaining exactly what the terms mean.

It Increases the Risk of Delinquent Accounts

Even if you thoroughly vet your customers before agreeing to net 30 terms, the possibility still exists that they’ll miss the due date. If multiple customers miss payment deadlines, the supplier may not have enough funds to cover their own expenses.

To work around this issue, you can offer shorter payment terms at the beginning of a relationship until a customer has proven they are responsible enough to have a net 30 invoice or longer.

How To Determine if Net 30 Is Right for Your Business

If you are considering using net 30 payment terms, it’s important to understand the impact it will have on your business. The pros and cons we’ve laid out can be used as a guide to determine whether the benefits outweigh the risks.

If your business operates with a large amount of cash on hand, then you’re in a good position to offer net payment terms. Otherwise, it might be better to ask for cash on delivery or test shorter net terms between 10 and 15 days.

Even if you have enough cash on hand, if you only rely on a few large customers, you may run into cash flow problems if just one payment is late. If you have a large number of clients, however, you’ll be in a much better position to compensate for multiple late payments.

Alternative Payment Method

While net 30 payment terms are a common approach for business transactions, there are other payment methods that might be more suitable to your situation.

Cash on Delivery

Rather than extending a line of credit, arranging for payment on delivery is still a viable business strategy for those that need the greatest amount of cash flow possible. There are multiple ways to go about accepting these payments, and they each present advantages and disadvantages for both parties.

• Credit card payments are easy for the customer to make, but they present the risk of chargebacks to suppliers and have an added processing fee of around 2.5%.
• ACH transfers require a little bit of work by the customer to set up, but will lead to easy transactions in the future that are affordable for the supplier.
• Checks are easy for the customer to make and avoid the fees associated with credit cards, but they require additional accounting work by the supplier.

The suitability of each of these payment methods is largely dependent on the state of the customer’s cash flow.

Shorter Net Payment Terms

If you’re intent on using delayed payment terms due to the competitive edge it provides, consider shortening the term you offer to net 15 or net 7. Your cash flow will still be impacted throughout the duration of the term, but your business will still be able to work with customers who are restricted by their cash flow.   

Net 30 payment terms can be a great way to draw in more clients, so long as they’re executed correctly. Nuvo offers further payment services to help businesses stay cash flow positive and mitigate risk. For more information, check out how we help suppliers and buyers navigate credit applications.

Net 30 Payment FAQs

Here are some common questions associated with net 30 payment terms.

What Does “Net 30 EOM” Mean?

Net 30 EOM means the 30-day payment term begins at the end of the month in which the invoice was sent to the customer. So if a customer is invoiced on November 15, their payment is due on December 30.

Do All Businesses Use Net 30?

No, not all businesses use net 30 payment terms for their transactions. Some companies allow for more time to make a payment, while others choose less time or none at all. Ultimately, the decision to use net 30 terms comes down to the business’s cash flow and the credit history of the customer.

Does Net 30 Build Credit?

Net 30 payment terms can help businesses build their credit if they successfully make payments on time and their vendor reports it to the credit bureau.