Perhaps one of the most common invoice payment terms is Net 30—a term that means your client has 30 days to pay their invoices.
It is used by businesses of all sizes around the world—small, medium, large, enterprise, and even freelancers.
However ubiquitous it may be, it doesn’t mean that it’s a perfect fit for all business types. In fact, for many smaller businesses and freelancers, it can be downright damaging to your business.
In order to use Net 30 correctly, you have to be aware of the pitfalls and learn to navigate around them.
That’s why today we’ll discuss the ups and many downs of Net 30 for small businesses and how you can adapt to protect yourself against its worst parts.
What is Net 30?
As mentioned above, in Net 30, the ‘30’ refers to the amount of days that the client has to pay the invoice. It is the most common amount of days for Net, although others are quite possible, including Net 21, Net 60 and even Net 90.
Larger businesses are more able to use larger Net terms, as Net 90 is definitely not recommended for smaller businesses.
Technically, Net 30 is a form of short-term credit that the seller is extending to the buyer (customer). This is because, while the goods or services have already been delivered, there is a 30-day, interest-free period that the seller allows for the customer.
Net 30 is a global standard as well. In fact, many countries like the UK have made it a legal obligation for customers to pay their suppliers within 30 days unless both parties have agreed to other terms.
What are the advantages of Net 30?
There are strong advantages to Net 30, and they are beneficial to both the supplier and the customer.
For you, the supplier, Net 30 allows you to appear more attractive to your customers (and potential customers).
Net 30 provides an incentive for your clients to buy from you because of the delayed payment (short-term credit extension). By allowing your clients to pay later, you are allowing them to hold onto their cash for longer.
For business clients especially, this means that they can decrease their cash outflows and thereby achieve greater cash flow. And, of course, with better cash flow, they are more capable of meeting their regular financial obligations, besides many other accounting-related aspects.
What are the disadvantages of Net 30?
Determining the disadvantages of Net 30 means we have to decide first of all what (or whom) Net 30 is most beneficial for.
If you are selling something to a customer, and you won’t get paid for at least 30 days, how will you be able to pay your bills, buy food, etc.?
For medium- and large-sized businesses, the answer is easy: with payments from their other clients. Those types of businesses have multiple clients and therefore multiple sources of revenue.
That means that they can afford to wait for one invoice to be paid, because either other invoices will be paid in the meantime or invoice payment period is substantial enough for them to be able to wait.
However, the story is not so great for smaller businesses. Small businesses tend to have much fewer clients, and many very small or new small businesses have only one or two main clients.
This means that the 30-day period can be quite difficult for them to bear, and the expenses will be racking up in such a way that once they do get paid, the money will dissappear quickly.
Even more, some clients are not sure when the 30 days actually start. Should the invoice be paid 30 days from the invoice issue date, the date it was received, or the date the goods/services were provided? Or can the 30 days start from when the client receives payment from his client?
Beyond that, smaller businesses also don’t have the time and resources to go after late payers. Therefore, clients tend to take advantage of them by taking extended credit extensions. Meaning: instead of Net 30, they will continually delay payment until it comes to Net 60, Net 90, or even net 120.
And because your business is so small, you have limited options. You can allow this client’s credit to be extended.
Alternatively, you can take your client to small claims court or cut your losses and move on—neither of which is particularly good for your business.
How to use an adapted Net 30
While the disadvantages probably outweight the advantages for most small businesses, there are certain things you can do to get the benefits and cut the disadvantages.
1. Decide on when the 30 days begin
This is the first and most important thing to do. Inform your client (or put it in the payment policies) that the invoice is to be paid 30 days from the date the invoice was issued—not received.
That means that if you ship the invoice along with goods, and it takes a week, the client will only have 23 days left to pay the invoice.
2. Use different Net terms
Instead of using Net 30, why not cut it down to net 21 (3 weeks)? This isn’t a particularly heavy burden for your clients, and it will allow you to be paid 9 days earlier.
You can even go as low as Net 15 or even Net 10—although, remember, the lower you go, the less incentive the client has to use your services at all. Net 15 or Net 21 are good starting points.
3. Add late charges
This should already be part of your invoice payment terms. Nonetheless, you need to make sure that you don’t continue giving interest-free credit to your client.
Add a late charge (for example, 5% of the invoice total) on a weekly or monthly basis for unpaid invoices beginning on day 31. This is a great incentive for getting your invoices paid on time.
4. Give Net 30 only to trusted clients
Lastly, you can decide to delay your Net 30 credit extension until you are sure your clients can make regular, timely payments.
For example, you can start your client off with a Net 15, and after 3 or 5 regular, on-time payments,, you can upgrade the client to Net 30. That way, you’ll be sure not to be burned by unstable clients.
With these four easy tipes, you can use Net 30 to your advantage. It’s a standard for a reason, but it shouldn’t be used the same for corporations as for small businesses.
With these adjustments, you’ll see your invoices getting paid faster and your business growing more steadily.