Complete Guide with Examples: Net D | Net Days | Net Due | Net 7-180 | Net Payment Terms | Trade Credit | Early Payment Discount
Have you come across Net 30 2%/10 or other Net Days payment terms (maybe on an invoice) … and you’re not 100% sure what it means – or how to use it to your best advantage?
You’ve come to the right place.
If you master the art of trade credit, like the Net 30 2/10 and Net Days terms, it can quickly help you generate more clients and cash on a very predictable schedule.
If not, it can do the exact opposite–drive your business into the ground–and also as fast.
So keep reading to find out:
1. What exactly is Net 30 / Net Days [definition + meaning]
2. Why it’s used by so many businesses [pros + cons]
3. How to use it [examples + alternatives]
4. Mistakes: How to protect yourself
5. Tips: Top 5 tips from a pro
In a nutshell, Net-30 is a payment term that informs customers that they have 30 days to pay an invoice.
The word “net” can mean two different things on an invoice:
1. Net amount due on an invoice is the price of goods or services before any deductions, such as sales tax, discount, fees or outstanding balances. The invoice total including all additional fees is the gross value.
2. Net 30 is a common form of a payment term, where the seller expects the buyer to make the invoice payment in full within 30 days. Essentially, Net 30 is a form of short-term interest-free trade credit financing extended by the seller to the buyer. Technically, the seller is lending the buyer money.
While vendors often offer a 30-day payment period and a 2% discount on credit sales to customers, the “2/10 Net 30” is certainly not the only kind of trade credit suppliers can extend to their clients.
For example, other common invoice payment terms include:
|Payment Terms||Explanation of Payment Terms: Net D | Net Days | Net Due|
|Net Due on / upon Receipt||= the buyer is expected to make the payment arrangements immediately upon delivery (also known as nROG or n/ROG = net due upon receipt of goods)|
|Net 7, 10, 14, 15, 30, 60, 90, 180||= the buyer has 7-180 days to pay for the order|
|EOM / End of Month||= payment is due at the end of the month|
|Net 10 EOM||= the invoice is due for payment within 10 days after the end of the month|
|Net 30 EOM||= payment is expected exactly 30 days after the end of the month|
|Net Monthly Account||= payment is expected by the end of the month following the month of the invoice/delivery (depending on the buyer-seller agreement)|
|Net 60, End of Month||= payment is due at the end of the second month following the month of the invoice/delivery|
|1.5/10 Net 30||= the full amount is payable within 30 days, but the buyer only needs to pay 98.5% of the amount if the invoice is settled within 10 days|
|2%/EOM Net 45||= the buyer will enjoy an early payment discount of 2% if the amount due is paid by the end of month, otherwise the total amount is due in full within 45 days|
|3/30 Net 90||= the buyer receives a 3% early payment discount if payment is made within 30 days, otherwise the total amount will be due in 90 days|
Let’s suppose you send or receive an invoice with the following particulars:
|1. Example: NET 30|
|Payment date and amount due:|
|Date:||On or before 30 January|
|Explanation:||The notation "net 30" means that the seller expects the full payment within 30 days. If a $1,000 invoice dated 1 January has the terms "net 30", the buyer must pay the full $1,000 within 30 days, which in this example falls on 30 January.|
|2. Example: NET 30 EOM|
|Payment date and amount due:|
|Date:||On or before 2 March (1 March in leap year)|
|Explanation:||The notation “Net 30 EOM (= end of the month)” means that the full payment of $1,000 is due 30 days after the end of the month. Here, the invoice was issued on 1 January and so the payment will be due on 2 March (or 1 March in the case of a leap year), which is 30 calendar days after 31 January.|
|3. Example: 2% 10, NET 30|
|Payment date and amount due:|
|Date:||• To avail of 2% discount (= pay 98%): On or before 10 January|
|• To pay in full (= 100%, no discount): On or before 30 January|
|Amount:||• $980 if paid within 10 days (10 January)|
|• OR the full $1,000 within 30 days (30 January)|
|Explanation:||The notation "2% 10, net 30" indicates that the buyer can take advantage of a 2% discount if the payment is made in full within 10 days, otherwise that total amount is expected within 30 days. So, in this example of a $1,000 invoice dated 1 January, the buyer can either take up a 2% discount ($1,000 x 2% = $20) and make a payment of $980 within 10 days (i.e., on or before 10 January); or alternatively pay the full $1,000 within 30 days (i.e., by 30 January).|
In Net 30, net-30 could mean 30 days after the sale, 30 days after delivery, or 30 days after the invoice.
This depends entirely on the agreement between the buyer and seller, as clearly stipulated in their contract to avoid any confusion.
However, the standard billing practice is that the payment for the goods or services is due 30 days after the transaction is completed. In other words, the 30-day period does not start from the invoice receipt date but rather the time when:
Shipping and transit time is included when counting the Net 30-day period. For example, a purchase that was in transit for 10 days before receipt by the buyer has just 20 remaining days until payment is due to the seller.
Hence, this is how the process looks from the seller’s point of view:
1. First, dispatch the products or perform the service
2. Next, send invoice to the buyer, requesting payment by a certain date
3. Keep track of the debt the buyers owe the seller using accounts receivable
4. Receive the invoice payment (= debt repayment) from the buyer within 30 days (provided all goes well)
Yes. Net 30 means that the purchaser is expected to pay the vendor in full on or before the 30th calendar day–including weekends and holidays–of when the services were fully provided or the goods were dispatched by the seller, transit time included.
Also, keep in mind that 30 days is not always equivalent to one month. For example, if an invoice is dated 5 March, clients are responsible for submitting payment on or before the 4 April.
Net 30 payment terms typically contain an interest penalty for not meeting the deadline and overdue payments begin to accrue interest on the 31st day after dispatch of products or completion of services.
That is why you should always make absolutely sure that the payment terms in any contract you sign are crystal clear.
Setting clear net payment terms helps ensure a business receive payments on a predictable schedule. Otherwise, customers may choose to pay invoices on their own schedule, which can cause the seller cash-flow problem that prevents it from purchasing the things it needs to continue to operate.
Customers appreciate having different payment options for settling their debts, such as discount programs and lines of credit. In some cases, this may even create competitive advantage.
Why would you give your customers extra time to pay an invoice, instead of asking them to pay immediately after a product has been delivered or service performed?
These are the 6 most common benefits of using Net 30 / Net D invoice payment terms:
1. Customers are more incentivized to purchase in the first place if there is an option to receive short-term interest-free credit and delay payment until a later date to optimize their cash flows.
2. Customers are more incentivized to pay earlier in exchange for a discount.
3. Customers are more incentivized to pay by the requested date if interest is charged on overdue invoices.
4. Customers feel trusted as a result of being offered net D payment terms, which is good for building long-term business relationships.
5. Competitive advantage can be created when a company offers more favourable payment terms than is otherwise common in its industry or market, which can make it stand out get ahead of the competition.
6. Ability to do business with larger clients that often require net D terms that align with their cash flow and accounting cycles; and facilitate the multiple layers of internal approval needed within their organization before making any payment.
On a flip side, there are also drawbacks associated with the net 30 / net D invoice payment terms:
1. Many small businesses simply cannot afford to wait too long to receive invoice payments due to limited resources and tight cash flows.
2. Some customers might take advantage of more lenient payment terms, which, again, may lead to cash flow issues on the vendor’s end.
3. Some buyers may end up not paying for their purchases at all unless cash changes hands immediately after the transaction, resulting in bad debts.
4. Some customers may be confused by what the payment terms mean, or miss them altogether, which can lead to misunderstandings.
When you are starved for sales, it can be rather tempting to extend your credit policies to attract more clients.
That may or may not be a smart move depending on the specific situation of your business.
Net 30+ payment terms are commonly used among private and public organizations of medium and large size because they have developed:
Net 30+ is also widely used in industries that involve tangible goods.
However, not all businesses use Net D terms. For example:
Hence, how much sales credit you can afford to extend to your customers and for how long depends on the type, size and financial stability of your business:
|How much sales credit can you afford?|
|1. Cash flow||• How much cash you have on hand|
|• What other sources of short-term financing (e.g., line of credit) you have access to and what the interest rates are|
|• How reliable are your cash flows|
|2. Customers||• How many customers you have – and want to attract going forward|
|• What type of customers you have – and want to attract in the future|
|3. Industry||• Whether Ned 30 / Net D terms are common in your industry|
|• What products and services your business sells|
Let’s imagine two companies in a traditional industry that involves tangible goods where trade credit is customary:
|Example: Company #1|
|Company 1 is an stablished business with plenty of cash on hand, multiple sources of revenue and short-term credit; generating steady cash flows and high value orders from a large varied customer base, which includes many reliable long-term clients.|
|Net Days||Company 1 can afford to incentivize purchases by offering attractive payment terms with interest-free trade credit and discounts.|
|Discounts||Company 1 can also pay its own suppliers early in exchange for a discount without any cash flow difficulties.|
|Example: Company #2|
|Company 2 runs a business that is in all aspects less established than Company 1.|
|Net Days||Company 2 can still entice buyers with trade credit, but offer payment terms that are less generous than those of Company 1 and will not result in cash flow problems if customers settle their invoices late.|
|Discounts||Company 2 can accept discounts for early payment, but only if doing so will not leave the business short on cash.|
Sellers may find many benefits in offering discounts for early payment as part of Net D terms, such as:
For buyers, the incentive lies in the discount itself.
Nevertheless, the buyer should always do the following two things before taking the seller up on an early-payment discount:
If you decide to go ahead and use Net D terms, here are my 5 best tips on how to make the best out of it:
Make sure the wording of the payment terms on an invoice is completely unambiguous.
For example, clearly explain in a contract and on an invoice:
Feel free to use different payment terms for different customers and situations. Just make sure that you keep track of everything.
Offer more favorable payment terms to customers you have established a relationship with.
For example, you could start new customers on Net 7-15 and then extend Net 30-90 only to trusted clients who always pay in full and on time.
Include penalties for non-payment into the invoice terms to motivate your customers to pay on time.
For example, you could charge daily/weekly/monthly interest fee for late payments as a percentage of the total invoice amount once a payment is past due
No matter how excellent your credit policies are, some customers may end up not paying for their purchases. In anticipation of bad debts from credit purchases, set up an allowance for doubtful accounts.
The Net D term is used in many variations. Sometimes it is hyphenated “net-“, combined with a forward slash “net/”, and/or followed by “days”. For example, all of these alternative are correct:
|Normal||Hyphenated “-”||Forward slash “/”|
|Net 30 days||N-30||Net/30|
|2.5% 10, net 30||2.5/10 Net-30 days||2.5/10, n/30|
|Net 30 EOM||Net 30, end-of-month||N/30/EOM|
Net 14 are payment terms on an invoice where the full amount is payable within 14 days after the dispatch or delivery of the invoice, goods or services–depending on the agreement between the buyer and the seller.
Net 15 is a payment term displayed on an invoice that lets the buyer know that the seller expects payment within 15 days.
On an invoice, the Net 60 Days payment terms mean that the payment is due in 60 days.
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