Net 30 is a common payment term that means the buyer has 30 days after the invoice date to pay the seller. This gives the buyer a bit of time to receive, process, and pay the invoice. Net 30 aims to find a balance between giving the buyer time to pay while ensuring the seller gets paid in a reasonable timeframe.
What does net 30 mean?
Net 30 indicates the buyer must pay the invoice within 30 days of the invoice date. For example, if the seller sends an invoice dated June 1st, payment is due by July 1st. The due date is 30 days after the invoice date.
This contrasts with payment terms like net 15 or net 60:
- Net 15 means payment is due 15 days after the invoice date
- Net 60 means payment is due 60 days after the invoice date
Net 30 hits a sweet spot between net 15 and net 60. Net 15 gives very little time for the buyer to pay, while net 60 stretches the timeline out. Net 30 provides enough time for processing while ensuring timely payment.
When is net 30 used?
Net 30 is commonly used in B2B transactions between businesses. It gives the accounts payable department time to process and pay the invoice. Processing can involve matching purchase orders, receiving confirmation, approvals, and issuing payment. Doing this in 15 days or less would be very difficult.
Net 30 also gives time for any disputes over the invoice to be addressed before payment is due. For example, if there are discrepancies over quantities or pricing, the buyer has 30 days to communicate with the seller and get it corrected.
For these reasons, net 30 is a standard term in many industries like manufacturing, distribution, wholesale, technology, and business services. It’s especially common when there are ongoing transactions between established business partners.
Net 30 example
Here is an example of how net 30 billing periods work:
- May 1 – Seller issues invoice to Buyer for $5,000
- May 1 – Payment due date is 30 days later on May 31
- May 31 – Buyer must pay invoice by this date
If the buyer does not pay by May 31st, they are past due. The seller may assess late fees or interest on overdue invoices.
Net 30 pros
There are several advantages to net 30 terms:
- Allows buyer time to process payment – As mentioned, net 30 gives the buyer’s accounts payable team time to process the invoice.
- Better cash flow for buyer – The buyer gets an additional 30 days to hold onto funds before paying.
- Time to resolve disputes – Any issues with the invoice can potentially be fixed before payment is due.
- Industry standard term – Net 30 is commonly accepted, so buyers are usually amenable to it.
For these reasons, net 30 offers a fair timeline that works for both buyers and sellers in many B2B industries.
Net 30 cons
There are some potential drawbacks to net 30 as well:
- Cash flow challenges for seller – The seller has to wait up to 30 days for payment, which can cause cash flow issues.
- Late payments – Some buyers still pay late, even with net 30 terms.
- Administrative costs – The seller incurs additional costs for invoicing, collections, etc.
Sellers may prefer shorter terms like net 15 to improve cash flow. However, buyers often resist timeframes shorter than net 30.
Is net 30 negotiable?
Payment terms like net 30 are negotiable between buyers and sellers. There are a few scenarios where negotiation may occur:
- Establishing terms for a new business relationship
- Renewing or updating an existing agreement
- If a buyer requests extended terms for temporary cash flow issues
- If a seller wants to shorten terms to improve their cash flow
The seller will typically propose initial terms, which the buyer can accept or counteroffer. Negotiation aims to find mutually agreeable terms.
For example, a seller may start with net 30 terms but the buyer counters asking for net 45 or net 60. The eventual agreement depends on factors like industry norms, the relationship between the companies, and their negotiating power.
Are there penalties for late payment with net 30?
Net 30 terms do not outline specific penalties for late payment. However, the seller can impose penalties if the buyer pays past the due date. Common penalties include:
- Late fees – A flat fee for payments received after the due date, e.g. $100.
- Interest charges – Interest accrues on unpaid balances, e.g. 1.5% monthly interest.
- Suspended deliveries – The seller stops additional shipments until invoices are paid.
- Changed payment terms – Moving to prepaid or COD for chronic late payers.
The seller should indicate policies for late payment in their terms and conditions. Penalties encourage buyers to pay on time per the agreed net 30 terms.
How to calculate payment due dates with net 30
Calculating net 30 payment due dates is straightforward:
- Record the invoice date.
- Add 30 days to the invoice date. This can be done manually or using the “=DATE()” function in Excel.
- The date 30 days after the invoice date is the payment due date.
For example, if the invoice date is May 1st:
- Invoice date = May 1st
- Add 30 days = May 31st
- So payment is due on May 31st
One tip is to be careful with end-of-month invoice dates – you’ll need to account for different month lengths. Using Excel or accounting software automates the due date calculations.
Do weekends and holidays count in net 30 terms?
With net 30 terms, weekends and holidays still count towards the 30 days. For example:
- Invoice date = Friday, June 1st
- Payment due date = Saturday, June 30th (29 days later, counting weekends)
The payment due date lands on a Saturday because weekends are included in the timeline. The buyer needs to ensure payment is made by June 30th and not delayed until after the weekend.
The same applies to holidays – any holiday days within the 30 day net terms are counted. Buyers should schedule payments in advance if a due date falls on a holiday to avoid delays.
Do net 30 terms require a purchase order?
Net 30 terms do not strictly require a purchase order from the buyer. However, a PO is recommended for several reasons:
- Creates a paper trail documenting the order
- Helps the buyer match the PO to invoices
- Ensures the seller provides the correct products/quantities
- Avoids disputes over order details
The buyer can issue a PO when placing the initial order. The seller can then reference the PO number on invoices to facilitate processing.
PO requirements may vary – some organizations do not use POs for routine purchases with established vendors. But for significant orders, POs add clarity even with net 30 payment terms.
Do sellers offer early payment discounts with net 30 terms?
Sometimes sellers incentivize early payment by offering discounts like:
- 2% discount if paid within 10 days
- 1% discount if paid within 15 days
This encourages the buyer to pay sooner in exchange for lower prices. The seller also benefits from faster payment.
Discounts may erode profit margins, so sellers carefully weigh whether to offer them. But they can be effective at improving cash flow from slow-paying accounts.
When are net 30 terms too risky for a seller?
Net 30 becomes high risk for the seller when:
- The buyer has a history of late payments or non-payment
- The buyer appears to be in financial distress
- The seller has high accounts receivable balances outstanding
- The seller lacks legal or financial recourse in case of non-payment
In these cases, the seller is exposed to the buyer defaulting before paying invoices. The financial risk may outweigh the benefits of the sale.
To mitigate risks, the seller can switch high-risk accounts to:
- COD (cash on delivery) terms
- Prepayment or deposits required
- Reduced credit limits
- More stringent credit policies
The goal is to ensure payment is guaranteed upfront rather than waiting an extended period.
How can sellers enforce net 30 payment terms?
Sellers have a few options to enforce net 30 terms and ensure timely payment:
- Charge late fees – Financial penalties incentivize buyers to pay on time.
- Stop shipments – Withholding orders pressures buyers to address past due invoices.
- Require ACH or wire payments – Automatically deducting amounts due bypasses buyer errors.
- Invoice clearly – Include obvious payment due dates, terms in bold, etc.
- Invoice on acceptance – Only start the 30-day clock once goods are received and accepted.
- Collections follow-up – Dedicated staff following up on past due accounts.
- Legal demand letter – Formal notification that failure to pay may result in legal action.
Automating reminders, past due notices, late fees, and collections efforts improves efficiency. Sellers should also periodically review accounts for slow payment trends.
How to request net 30 payment terms from suppliers
As a buyer, follow these tips to request net 30 terms from your suppliers:
- Inquire about standard terms – Don’t assume net 30 is offered.
- Build a payment history – Demonstrate you reliably pay on time.
- Offer to pay via ACH – Automatic payments provide assurance.
- Agree to late fees – Show you accept consequences for late payment.
- Start with net 15 – Earn extended terms by first paying more quickly.
- Leverage purchase volume – Higher sales may justify extended terms.
- Request trial periods – Ask for net 30 on a few orders to prove your reliability.
Suppliers want assurance you will pay on time. Providing financial statements, paying via ACH, and offering to pay fees demonstrates good faith.
Should sellers extend net 30 terms to boost sales?
Sometimes sellers extend terms beyond net 30 to win business, such as:
- Net 45 terms
- Net 60 terms
- Net 90 terms
The advantage is this can incentivize buyers to purchase from the seller over competitors with shorter terms. It also gives buyers with limited working capital more time to pay.
However, the risks include:
- Increased defaults and bad debt
- Administrative costs of collecting
- Cash flow delays
Sellers should only extend terms for creditworthy buyers willing to accept late fees, interest, and other enforcement provisions.
Stricter credit policies, financial controls, and monitoring of past due accounts can help mitigate risks of offering extended terms.
Transitioning existing customers to net 30 terms
If sellers want to transition customers from looser terms like net 60 to net 30, some tips include:
- Provide advance notice – Give customers time to adjust.
- Implement gradually – Transition subset of invoices first before expanding.
- Highlight benefits – Getting paid faster improves your cash flow to serve them better.
- Offer discounts – 1% discount for paying net 30 instead of net 60.
- Provide exceptions – Work with customers significantly impacted to find alternatives.
Communicating early and partnering with customers on the transition can minimize pushback. Be flexible but firm on the eventual timeline.
Does offering net 30 terms increase sales?
Net 30 terms usually do boost sales volume for the seller. There are a few reasons why:
- Buyers have more working capital available since they don’t have to prepay.
- The selling company is more attractive than competitors with shorter terms.
- Customers can order more volume when they have 30 days to pay.
Studies show that companies offering net 30 terms have higher sales growth compared to businesses requiring upfront deposits or prepayment. Net 30 ultimately grows the seller’s customer base and revenue.
However, sellers need credit policies and financial controls to minimize risks from extending terms. Qualifying buyers, limiting exposure, and collecting diligently keeps success sustainable.
Conclusion
Net 30 payment terms offer an industry-standard balance between giving buyers time to pay while enabling sellers to maintain cash flow. Establishing consistent processes for invoicing, managing timelines, and following up on collection is key. Automation and strict enforcement also protects sellers from excess risk. Overall, net 30 terms facilitate business-to-business commerce across many industries.