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What Are Net Terms?

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Last editedNov 20223 min read

Payment terms are a key element of any effective invoice. Your customer needs to know when payment is due so that they can plan accordingly. While some businesses ask for payment upon delivery of invoice, others give customers more time to pay. Net terms are a standardised way to outline this payment due date and expectations. So, what does Net 30 mean in payment terms? We’ll cover the basics in this guide.

What are net payment terms?

Have you ever seen terms like Net 30, Net 60, or Net 90 on an invoice before? These are all examples of net payment terms. Sometimes called credit terms, they give customers more time to pay for goods and services. The number, such as 30 or 60, refers to the number of calendar days a customer has before the payment is due. Net payment terms extend a grace period for payment. Some businesses encourage customers to pay earlier by offering a discount for invoices settled before the due date.

What does Net 30/60/90 mean in payment terms?

Net payment terms usually include a number, such as 30, 45, 60, or even 90. This simply shows the number of days that the recipient has before invoice payment is due.

Net 30 payment terms: Invoice is due in 30 days
Net 45 payment terms: Invoice is due in 45 days
Net 60 payment terms: invoice is due in 60 days
Net 90 payment terms: Invoice is due in 90 days

What are net monthly payment terms?

Sometimes a business lists net monthly payment terms rather than specifying a number. This means that the invoice is due at the end of the month following the invoice’s date. For example, if you issue an invoice dated 15 July with net monthly terms, payment will be due on 31 August. Some invoices call these EOM (end of month) terms. In either case, payment is due at the end of the month following the month in which goods or services were delivered.

What defines the start of a net period?

To better understand the different types of payment terms, you’ll also need to define the beginning of the net period. In most cases, this is the invoice’s date of issue. However, here are a few additional ways to define the beginning of a net period:

Date that invoice is postmarked
Date that invoice is received by customer
Date that goods or services are delivered

To avoid any confusion, be sure to agree on these invoice terms as part of your initial sales contract.

What are the pros and cons of using net payment terms?

If you have sufficient working capital and positive cash flow to support it, there are several benefits of using net terms.

Advantages include a potential boost in sales figures. By accepting delayed payments, you can attract customers who might not be able to afford an up-front purchase. Customers have time to sell their own goods before paying the bills. If you cater to small and medium-sized businesses with limited cash flow, offering credit terms makes your business more competitive. At the same time, longer payment terms show that you trust your customers, which can build loyalty and mutual appreciation.

On the other hand, there are also a few pitfalls to be aware of. Using Net 30/60/90 terms extends your billing and payment cycle. This becomes particularly problematic if customers don’t pay on time when the terms are already so lengthy. You’ll need to put additional safeguards in place to ensure a steady cash flow, chasing up on late payments immediately.

Should your business use net terms?

If you operate under tight profit margins or in an industry that requires swift payment, net terms won’t be right for you. Yet for those who have more flexibility, net terms can attract new customers and give you a competitive edge. Don’t discount the toll that a complex accounts receivable process can take on your business. You’ll need to assess creditworthiness, manage overdue invoices, follow up on accounts receivables, and reconcile all payments in your system.

Automating your invoicing process offers plentiful benefits, whether you decide to use net terms. You can streamline the billing and payments process using invoicing software. GoCardless integrates seamlessly with over 300 partners, including Xero,QuickBooks, and others. Maintain full visibility over the invoicing process and reduce late payments with automatic direct debits. You’ll also be able to reconcile these invoice payments automatically, freeing up time and money.

We can help

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.