You just had a great meeting with a new client. You’ve agreed on the scope of your work, the hourly rate your client will pay you, and an estimated total cost for the project. There’s just one more thing you need to figure out: will you offer them net 30 terms?
But what does net 30 mean, exactly? And should you automatically agree to net 30?
Here’s everything you need to know.
What does net 30 mean?
When you offer someone net 30 terms, you’re offering them the chance to pay you up to 30 calendar days after you bill them for a good or service.
Net 30 is a form of trade credit. In other words, when you agree to net 30 terms, you’re technically issuing a short-term business loan to your clients, much like a bank or credit card company does when consumers make purchases using their credit cards.
You deliver goods and services immediately and keep track of the debt they owe you using your accounts receivable. And if all goes well, they’ll repay the debt in 30 days.
Net 30 payment terms are one of the most common invoice payment terms, but they aren’t the only kind of trade credit you can extend to your clients—net 10, 14, 15, 30, and 60 are also common.
What are the benefits of using net 30 terms?
The main benefit is that it lets you take on more clients than you would if you instead required immediate payment for your goods and services. Offering net 30 trade credit lets you serve businesses that might not have a big pile of cash lying around, such as small businesses.
This is why you’ll often see big businesses offering their clients generous trade credit terms—net 30, net 60, sometimes even net 90. They usually have enough cash on hand to survive not getting paid by a client for 30, 60, or 90 days, and offering longer net terms lets them cast a much wider net when looking for new clients.
Why do clients like net 30 accounts?
Beyond the obvious (extra time to pay their invoices and manage their cash flow), many new businesses will establish net 30 accounts with their vendors in order to build their business credit. Establishing these “small vendor lines of credit” or credit lines can help new businesses build their credit score and access additional capital.
However, this strategy only works if the vendors report their accounts to business credit bureaus like Dun & Bradstreet (D&B), Experian Business, or Equifax Business—and vendors aren’t required to do so.
Further reading: Building Business Credit: An 11-Step Guide
When exactly does net 30 start?
The due date in net 30 terms can vary, depending on what you and your client have agreed to.
The “30” in net 30 could mean 30 days after the sale is made, 30 days after the goods are delivered on the client’s doorstep, 30 days after the website you designed for them goes live, 30 days after the invoice date, or some other date. It really depends on the nature of your business and how generous you’re willing to be with your clients.
Whichever date you go with, make sure you spell it out ahead of time, using crystal-clear language in any contracts you both sign.
Net 30 always includes calendar days (i.e., weekends, holidays, and business days). Make sure the contract you sign with your client makes that clear.
What does “net 30 EOM” mean?
Net 30 end of the month (EOM) means that the payment is due 30 days after the end of the month in which you sent the invoice.
For example, if you and your client agree to net 30 EOM and you invoice them on May 11th, that payment will be due on June 30th—in other words, 30 days after May 31st.
What does “2/10 net 30” mean?
Net 30 terms are often coupled with a discount for early payment to encourage the client to pay more quickly. For example, small business owners will often offer net 30 terms with a 2 percent payment discount if the client offers a full payment within 10 days. On contracts and invoices, you’ll see these terms written out as “2/10 net 30.”
You can also change it up to whatever terms you’d like. For example, if you wanted to offer your client net 60 terms with a 5 percent discount if they pay within 15 days, you would write that out as “5/15 net 60.”
Do all businesses use net 30?
Not at all. Whether or not a business chooses to use net 30 terms depends on the kind of business they operate. For example, retail businesses rarely extend credit to their clients. If you want to buy an espresso from your local cafe, you’ll usually have to pay for it on the spot.
Many smaller, non-retail businesses will also avoid net 30 because 30 days is simply too long for them to wait to get paid. They might extend less generous payment terms, like net 14, or they might not extend trade credit at all.
Although it’s most common in the world of big business, small businesses in consulting, graphic design, software development, and other service industries will sometimes also offer net 30.
How do I decide if net 30 terms are right for my business?
It all depends on how much cash you have on hand, how many clients you have, whether it’s common in your industry, and most of all, how generous you can afford to be with your clients.
If you have plenty of cash on hand, have many different clients, and could survive a few late payments from them, net 30 might help you gain more clients.
On the other hand, if you don’t have a lot of cash on hand and only depend on one or two clients, offering them net 30 terms on their payments could get you into cash flow problems, especially if they pay late.
When you’re starved for sales, it can be tempting to loosen up the rules you have in place to extend credit to your clients (also known as your business credit policy)—don’t. The amount of sales credit you extend to your clients and for how long should depend on your business needs and how generous you can afford to be.
In cases like these, it can help to think like a lender, since extending your credit terms or offering longer payment terms is like increasing your clients’ credit limits. Does their payment history justify more generous terms?
If your business is still in the early stages or you haven’t yet developed a reliable cash flow rhythm, consider asking for upfront deposits on large orders and adding interest for late payments into the contracts you have clients sign. If you want to minimize risk even further, consider requesting a business credit check on new clients before issuing any trade credit.
When a new client signs up and sees these terms, they’ll understand that you’re serious about getting paid on time. After all, no one likes to pay a late fee.
So how do I get started with net 30?
If net 30 seems like the best fit for your business, all you need to do is write it into your contracts and clearly explain it to your next client before you begin the project. If they agree to it and sign the contract, you’re officially up and running on net 30!