What does net 30 mean?
Net 30 is a term used on invoices to describe the deadline for payment of an invoice. Net 30 means that payment is due within 30 days of when the invoice is received. Essentially, a seller who sets payment terms of net 30 is extending 30 days of credit to the buyer after goods or services have been delivered. Net 30 means that the buyer has 30 calendar days after they’ve been billed to remit payment.
Maintaining a good relationship with your vendors can build trust and provide you with products and information that can help your business grow. In some cases, staying on top of your vendor and supplier invoices can also save you money. Learn to get paid faster in accounts receivable and save money in accounts payable with a clearer understanding of net 30 and early payment discounts, such as 2/10 net 30.
How does net 30 work?
To extend net 30 payment terms in an invoice, a seller simply needs to list the phrase ‘net 30’ within the payment terms section of the invoice. The seller then completes the rest of the invoice as normal, then delivers the invoices to their customer after goods or services have already been delivered.
In a perfect world, the customer would then always pay the invoice within that 30 day period. However, late payments still happen on a regular basis for small to medium businesses in every industry.
After the 30 day period has ended and payment still hasn’t been received, a seller can then escalate the issue with a demand for payment, and from there the next step may be legal action in order to ensure payment.
When does net 30 start?
There is some confusion about when the net 30 period actually begins. Is it 30 days after goods or services were delivered? 30 days after the sale is agreed to? 30 days after the invoice is delivered?
The net 30 period generally begins on the day the invoice is delivered to the customer–the invoice date. So if goods were delivered on a Monday, but the invoice wasn’t sent until the following Wednesday, the customer has 30 calendar days from that Wednesday to send payment.
That said, the exact terms of a net 30 term in an invoice depends on the buyer and seller. It’s important to clarify with customers exactly what the term means in a specific instance, so there’s no confusion.
What are the advantages and disadvantages of net 30?
Net 30 terms are advantageous for sellers because they strike a balance between being generous and conservative. 30 days is plenty of time for a customer to approve, process and send a payment, but not so long that a payment may be delayed too long.
Net 30 terms are essentially an expression of trust between a business and their customer, communicating that the business is comfortable with longer payment terms because they know they can depend on the customer to pay.
With that in mind, some businesses are reluctant to offer net 30 terms to new customers without an established history of transactions.
There are disadvantages of net 30 terms for invoices. Namely, many startups simply can’t afford to wait 30 days between the costs associated with delivering a good or service and the receipt of payment to offset those costs.
By using the 2/10 net 30 discount, not only can you spend less money on your bills, but you can gain the trust and respect of your suppliers and vendors. This can help you gain access to better products, services, and information that can give you an edge in your business. Suppliers and vendors may offer other discounts and advantages down the road, as well.
What are the alternatives to net 30 terms?
Net 30 has become a common standard for many businesses, but it’s by no means required. In fact, a seller has a right to request any payment terms— assuming the buyer also agrees. Terms of net 7, net 20, net 30, net 60, and sometimes even net 90 are relatively common.
That said, decisions about net terms in invoicing are and should frequently be conducted on a case-by-case basis. For example, compare two hypothetical customers. One has been a loyal buyer for several years, always paying invoices on time. The second customer has only been a customer for two months and has already missed two payment deadlines.
A small business owner is more likely to extend generous net payment periods for the first buyer than the second.
What does 2/10 net 30 mean?
An invoice with 2/10 Net 30 payment terms is due within 30 days as with all invoices with net 30 terms, but with the note that if paid off within 10 days, the customer will receive a 2% discount. A vendor may use net 30 2/10 terms in order to encourage fast payment of invoices.
Let’s say that a buyer wants to provide a net 30 payment window, but in order to encourage even quicker payment, they want to offer a 2% discount off the total cost if the customer pays within 10 days. This would be marked in invoice terms as ‘2/10 net 30.’ The first number signifies the percent discount, the second number signifies the time period for payment when the discount is available, and the ‘net 30’ signifies the overall deadline for payment.
If your vendors or sellers offer the 2/10 net 30 discount and you want to pursue it, here's what you need to know about how it's calculated.
How to make a 2/10 net 30 calculation
Let's say you purchased products on the 10th of the month for $500 and you're invoiced for that amount on the 15th. If you pay that invoice amount off anytime between the 15th and the 25th of that month, you may be eligible for the 2% discount the vendor offers.
Discount (2%) x The Full Amount ($500) = Discounted Amount ($490)
Keep in mind, however, that if you don't meet the payment terms and pay within that 10-day window, you'll have to pay the entirety of that invoice with no discount. Remember that this includes weekends and holidays, not just business days.
Most accounting software can calculate early payment discounts for invoices, however integrating with an AP solution, such as BILL, can further help with keeping on top of invoices’ discount period and bookkeeping.
Pros of 2/10 net 30
From an accounts payable point of view, if you’re making a decent profit with you business and you have access to a line of credit for any financing needs, you may be able to afford to pay your invoices early and within that 10-day window. When your business is in a strong position, it can be a wise move to take advantage of discounts like 2/10 net 30 to reduce liabilities. This can help you to save money over time and put yourself in an even better financial position. Approaches like payment automation can help you to stay on top of these due dates and overall payable process.
If you’re working on accounts receivable and you know your company has some bad debts to pay off, you may want to offer this trade credit to encourage your customers/clients to pay early and speed up collections of credit sales to improve cash flow.
Cons of 2/10 net 30
In some instances, it may not be in the best interest of your business’s cash flow to pay your bills early. Perhaps you’re behind in your account receivable process and paying early could put you in the red. It could also prevent you from investing that working capital in other important areas of your business that may be more vital. When it comes to 2/10 net 30, it’s important to weigh whether paying your bills within that 10-day timeframe is within your business’s best interest.
Also, if you are the seller offering trade credit and the customer takes advantage of the discount, know that your company will reduce its revenue in the income statement. Offer such invoice terms with your profit margin in mind.
Alternative early payment discount terms to 2/10 net 30
While 2/10 net 30 is the most commonly used early payment discount offer in business to business sales, alternative trade credits can be extended to the buyer from the seller. Here are some examples:
- 2/10 net 45: Similar to 2/10 net 30, these credit terms mean that the buyer can take advantage of a 2% discount if they pay their invoice for cost of goods or service within 10 days. If not, they'll need to pay the total amount within 45 days.
- 3/10 net 30: With this discount term, the buyer can receive 3% off should they pay their bill within the first 10 days. However, if they fail to do so, they’ll need to pay the full amount with no discount within 30 days.
- 3/20 net 60: A discount of 3% for payment within 20 days of a 60 day window. Note the change in the number of days in this discount offer. Buyers are responsible for the entire net amount due by 60 days of receiving an invoice (invoice date).
- 2/EOM net 45: In this case, the buyer will need to pay the invoice off by the end of the month if they want to receive the 2% discount. If not, the buyer will need to make the full payment for the invoice within 45 days after the invoice is issued.
Immediate payment: In some cases, the seller may require that the buyer pay their bill immediately upon receiving the invoice. If your vendors and suppliers don’t offer cash discounts, you may be able to negotiate with them if you are in good standing with them.
Overall, net 30 or other net invoice payment periods are an opportunity for businesses to set standards for when they’d like to be paid after rendering goods or services to customers. 2/10 net 30 is trade credit offered by sellers to buyers to encourage early payment.
