April 29, 2021 | Last Updated on: February 21, 2023
As small businesses mature and grow, their invoicing and payment strategies mature as well. Growing your client base and revenue streams requires the ability to be flexible with how you manage payments for your goods and services. Small business owners can use the accounts receivable management abilities of their accounting software or system to use delayed payment strategies like Net 30.
We’ve put together a guide to introduce you to what Net 30 invoicing is, how it works, and how it can either advantage or disadvantage your growing business.
To put it simply, “Net 30” is a payment term that tells your customer that they have 30 calendar days (importantly not business days) to pay for the goods and/or services after they have been billed/received the invoice rather than making the full payment upfront. This practice in payments is known as a “trade credit”, where customers can pay the full amount for goods or services at a date later than the day they receive the goods. In this way, offering Net 30 is technically offering an interest-free loan to your customer.
Net 30 isn’t the only type of trade credit you can offer to your customers. Net 10, 14, and 60 are also common. They work in the same way. For example, Net 10 requires that customers pay you within 10 calendar days of receiving their order.
Other common forms of Net 30 include the following:
Your business will deliver the goods and services immediately, keep track of what your customer owes to you, and then (hopefully) your client pays within 30 calendar days.
The Net 30 timeframe – the countdown clock until the amount due needs to be paid – starts at a previously agreed-upon phase of the sale. This might mean the moment the sale is made, when the product arrives at their doorstep, when the service (for example, a consulting engagement’s deliverable) has been completely furnished, the second you send an electronic invoice, or some other point in time.
It’s important to align with your customer on the understood definition of when the Net 30 timeframe starts and stipulate that in any contract or agreements you make. Including this as a reminder in the notes of your invoice payment terms is a common best practice.
Offering trade credit allows you to engage with clients that might not always have enough cash on hand to pay for your product or service right away. Flexible payment terms, like Net 30, keeps those customers whose business needs include delayed payments in your sales funnel. This opens up business with those that are interested in your product or service but can’t handle strict payment terms.
If your small business has a good amount of cash on hand and can survive without payment for 30 days, Net 30 can be an excellent strategy to drive up sales volume.
Larger businesses, who have very diverse revenue streams and plenty of cash on hand, sometimes offer up to Net 60 or Net 90 billing terms.
By offering customers the option to pay at a later date, you’re letting them know that you trust them to make good on the payment. This can be very helpful in developing customer loyalty and deeper relationships with clients, especially new ones, which can lead to expanded revenue opportunities or upsold product offerings.
By definition, using Net 30 terms delays the flow of cash into your business. Many small businesses can’t afford to wait 30 days to receive payment because of cash flow issues. If you offer Net 30 terms but can’t afford it, you’ll quickly find yourself in a debilitating cash crunch that could sink your business.
In addition, if your business only has a few large clients, you could find yourself in a similar situation of being strapped for cash. A diverse client base is more amenable to trade credit invoicing.
One way to get your business used to trade credit invoicing terms is to slowly build up the trade credit timeline. Start with Net 10 and continually build until you can comfortably handle and offer Net 30 terms.
The long payment timelines might become a liability for your business if you’re met with mismanagement of payments or deliberate exploitation of flexible terms. Be careful when offering these terms to new or existing customers, especially those with a history of late payments.
If you’re straddling the line of affordability of Net 30 terms when it comes to your small business’s cash flow, late payments can be especially painful. Research shows that 11% of invoices sent by small businesses are paid late and 5% written off as “bad debt”, which can result in forgoing planned investments or, in severe cases, layoffs.
One way to discourage this is to charge interest on payments if they are paid late, just like you might do for a short-term loan or late credit card payments, or stipulate punitive late fees.
Net 30 can be a great method for driving business revenues, especially for established small businesses that are looking for ways to grow and expand. Offering competitive trade credit terms can incentivize customers to choose you over the competition, and it can also lead them to buy in larger volume or more types of products at one time.
As always, due diligence is key here, and you must be certain that you are able to offer such terms. If you are unsure, it is better to be safe than sorry. Seeking out a certified public accountant (CPA) who specializes in assisting small businesses may also be of use, as they might be able to provide critical analysis of your cash flow situation.
At the end of the day, Net 30 is a popular tool utilized by both small and large businesses across the nation. So, it is definitely something worth looking into if you are a small business owner. Managed properly, a Net 30 system could provide incredible long-term benefits to your business!
March 20, 2023
