Net terms refer to how soon an invoice is due following the billing date. In other words, this is the latest date a company requires complete payment.
Net terms can appear at the top or bottom of an invoice. They can be tailored to each client depending on payment history, credit history, and purchase volume.
How net terms affect your cash flow
You can protect your cash flow by:
- Making sure clear protocols are in place to ensure that invoices are made as soon as work is done.
- Sending out your invoices as quickly as possible; the sooner you do, the sooner you will be paid.
- Clearly define your business’s payment conditions, and be prepared to track down any late payments right away.
- Making it clear that you will charge interest on late payments – you have a right to do so.
Customers will pay late if they know they can. Offering incentives encourages your clients to pay earlier. For example, if your client pays at the time of service, you could give them a small discount. This has the potential to be more successful than punitive actions.
When running a small business, it’s critical to avoid unwittingly losing money by providing an early payment discount. If you give a 10% discount for early payment, the reduced price should equal the amount you want to earn for the service, and the full price should be somewhat more than the amount you need to make.
What are the types of net terms?
Net payment conditions are usually followed by a number that indicates when the invoice is due. For example, net 30 means the merchant expects complete payment within 30 days after the invoicing date.
Some small businesses may not have the same payment conditions for all their clients. You might opt to provide net 60 or net 90 payment periods to valued clients. You could also begin with net 10 or net 15 for late-paying or new clients. Net 10 and net 15 are frequently used by service-oriented businesses and contractors. However, the most widely used net payment due-date phrases are net 10, 30, and 60.
Net 30 ends of the month (EOM) signifies that the payment is due 30 days after the end of the month when the invoice was made.
Benefits of net terms
There are many advantages to providing net terms including acquiring new clients, expanding your business, gaining a competitive edge, and fostering customer loyalty.
Your business will have a competitive edge over others who do not provide net terms.
Net terms bring the potential to open the door to new clients. Offering net 30 terms will greatly expand your client base, as many consumers like the 30-day payment option, especially those who may be suffering cash flow issues of their own.
Drawbacks of net terms
While there are benefits to settling invoices with customers early, businesses will suffer from late payments. Again, these late penalties are often a percentage of the overall amount, plus interest for failure to fulfil the payment conditions.
Prolonged net payment periods can cause cash flow concerns for small firms that rely on a consistent, on-time cash flow of payments to develop new products and services and earn additional money.