If you’ve ever received an invoice or made a business purchase, you've likely come across something called “net terms.” But what does it mean? Is it just another confusing business term, or is there more to it?
Whether you’re just starting out or you’ve been running a business for years, understanding net terms can help you better manage your cash flow and build strong relationships with your vendors. Let’s break down everything you need to know about net terms, from what they are to how they work.
What Are Net Terms?
"Net terms" refer to the amount of time a buyer has to pay an invoice after the seller has delivered the goods or services.
For example, if an invoice says “Net 30,” it means the buyer has 30 days to pay.
But net terms aren’t just about a number—they also influence how your business operates, how quickly you get paid, and even how you negotiate with suppliers.
Net terms can vary, typically ranging from Net 10, Net 30, Net 60, or even Net 90. The number after “Net” tells you how many days you have to pay. For example, with Net 30, you need to make or receive payment within 30 days.
Why Do Net Terms Matter?
Net terms provide businesses an additional layer of flexibility when it comes to paying suppliers. Instead of paying everything upfront, you can spread out payments over a set period, which is helpful for managing cash flow. This is especially important for small businesses that may not have a lot of cash on hand at any given moment. Net terms help you plan ahead, buy what you need now, and pay later without causing a financial strain.
On the flip side, for the business extending net terms, net terms mean trust. You’re essentially allowing the buyer to receive goods or services without immediate payment. This requires a certain level of confidence in the buyer’s ability to pay when the time comes.
How Do Net Terms Work?
Net terms are pretty straightforward, but the details can differ from one business to another. The most common form of net terms is simply “Net [number of days]." This means the customer has that many days to pay the full amount of the invoice.
For example, say your business sells $10,000 worth of materials to a buyer on a Net 30 agreement. This means the buyer doesn’t have to pay for the materials immediately. Instead, they have 30 days to settle the bill. After those 30 days, the full $10,000 is due.
But net terms can also come with a little incentive for paying early. Some companies use what's called “2/10 Net 30” terms. In this case, the buyer can take a 2% discount if they pay within the first 10 days, but they still have up to 30 days to pay the full invoice if they choose not to take the discount. It’s a win-win: the seller gets paid faster, and the buyer saves some money.
Common Types of Net Terms
Here are the most common net terms you might encounter:
- Net 10: Payment is due within 10 days of the invoice date. This is usually for smaller or quick-turnaround transactions.
- Net 30: Payment is due within 30 days of the invoice date. This is one of the most common terms and provides a good balance between cash flow management for the buyer and getting paid on time for the seller.
- Net 60: Payment is due within 60 days. This gives the buyer more time but can be risky for the seller, as it means waiting longer to receive payment.
- Net 90: Payment is due within 90 days. This is typically used for larger contracts or trusted, long-term business relationships.
Each type of net term can offer something different, depending on the needs of the buyer and seller. Shorter terms benefit the seller by ensuring faster payments, while longer terms can provide the buyer with more control over cash flow when managing finances.
Advantages of Net Terms
For both buyers and sellers, net terms can provide several benefits:
For Buyers:
- Improved Cash Flow: By delaying or spreading out payment, you can use your available cash for other investments or operational needs before having to pay the full invoice.
- Strong Vendor Relationships: Reliable payment history can help build trust with suppliers, potentially making them more willing to offer better terms in the future.
- Growth Opportunities: With net terms, businesses can buy what they need to grow without immediate financial pressure.
For Sellers:
- Increased Sales: Offering net terms may benefit buyers who might not have been able to purchase without the extended payment window.
- Customer Loyalty: Suppliers that offer flexible terms can build stronger, longer-lasting relationships with their clients.
- Early Payment Discounts: If you offer a discount for early payment, you can receive cash faster and improve your own cash flow.
Risks of Net Terms
While net terms are a great way to improve flexibility, they also come with some risks:
- Delayed Payments: Net terms allow the buyer to take time to pay, but there’s always the risk they won’t, or they’ll take longer than agreed.
- Cash Flow Issues: If your business depends on immediate payment, extending long net terms could result in cash flow problems.
- Credit Risk: Net terms are similar to extending credit to a customer. If they fail to pay, you could be out the goods or services you provided and the money you were expecting to receive.
To manage these risks, some businesses use tools like invoice factoring (selling unpaid invoices to a third party for immediate cash) or they run credit checks on customers before extending net terms.
Is Offering Net Terms Right for Your Business?
Whether or not to offer net terms depends on several factors.
Consider the financial health of your business, your industry standards, and your relationship with customers. If you have enough cash flow to cover payment delays, offering net terms could boost sales and build customer loyalty. But if your business needs immediate payment to operate, longer terms might not be a good fit.
Net terms can also be a useful negotiating tool. If you’re trying to win a new client, offering them extended payment terms could help secure their business.
Net Terms for Max Success
Net terms might seem like a small detail, but they can have a huge impact on your business.
By understanding net terms, you can better manage your cash flow, build strong relationships with your customers, and create flexible payment options that work for both sides.
Whether you’re a buyer looking to optimize your purchasing power or a seller trying to balance risk and reward, net terms are a powerful tool in the world of business.
Learn how net terms impact your AP process by contacting Nimbello today!