Net 30: The Best Payment Term for Your Small Business?

If you're a small business owner, chances are you've heard the term "net 30.” But do you know what it means and how it can impact your company’s finances?

We'll dive into everything you need to know about net 30, including its advantages, disadvantages, and alternatives.

Let’s get started.

Net 30, a term found on invoices, simply means a customer has 30 days from the invoice date to pay the bill in full.

For example, if your client’s invoice date is May 1 with net 30 terms, payment would be due on May 31.

Net 30 is one of several common payment terms used in business, with other examples including net 60 and due on receipt.

Net 30 is commonly used in business-to-business transactions and is usually agreed upon before any work is done or products are delivered. (It’s smart to agree on these terms in writing with your client.)

Net 30 payment terms are often used when the buyer needs time to review and process the invoice or when the seller wants to extend a line of credit to the buyer.

Your customers may or may not be familiar with the term net 30. When you send out an invoice, it’s important to clearly communicate your payment terms so clients know exactly how long they have to pay. 

You might consider writing your net 30 term like this: 

1. Payment terms: Net 30. Payment is due 30 days from invoice date.
2. Net 30: Balance due within 30 calendar days. 
3. Our payment terms are net 30. Please pay in full by Oct. 30, 2023. 

How you phrase your payment terms on an invoice is up to you. It’s smart to include payment methods (cash, check, credit card, etc.) near this section. 

You can also describe any late fees or interest charges the customer will face if he or she fails to pay the invoice on time

Net 30 is just one of many payment terms used by small businesses. Here are some other terms you may encounter.

• Net 15: Similar to net 30, but the customer has 15 days to pay the invoice instead of 30.
• Net 60: The customer has 60 days to pay the invoice.
• Due upon receipt: The customer is expected to pay the full amount immediately upon receiving the invoice.
• Cash on delivery: Payment is due at the time the product is delivered.

You might consider knocking a few bucks off the bill if customers pay an invoice early. For example, you might offer a 3% early payment discount to clients who pay within 10 days of receiving their invoice. Early payment discounts can incentivize customers to pay before the 30 day deadline. 

Regardless of the payment term you choose, it’s important to create and send out invoices as soon as the work is done or products are delivered. Staying on top of invoicing will help you maintain a healthy cash flow.

If you're not sure whether a net 30 payment period is right for your business, consider these alternative payment terms. 

• Upfront payment: Requires clients to pay a portion of the invoice upfront before work begins or products are delivered. This could take the form of a deposit or a down payment. Or you could require the entire payment upfront — it’s up to you. 
• Payment plans: Have a loyal customer who’s fallen on hard times? Consider offering a payment plan option to spread out the cost over a longer period.

Progress payment: Payments are made throughout the project or service, usually when certain milestones are reached.

Managing invoices and payment terms probably isn’t your favorite part of running a business.

Invoicing and accounting software can make it easier by streamlining the process. Programs like Freshbooks and Zoho let small businesses create invoices, email reminders, track payments and follow up on late payments with clients — all in one place,

With accounting software, you can:

• Create professional-looking invoices: You can set up default payment terms, such as net 30, and customize invoices for each customer. (For a free version with solid features, try Wave.)
• Send automated payment reminders: Save time by setting up automatic reminders to clients. You might program the software to send an email five days before an invoice is due and another alert a few days after the due date.
• Accept online payments: Many accounting and invoicing software options let you accept online payments, making it easier for customers to pay their invoices.
• Generate financial reports: Accounting software can generate financial reports that give you a clear picture of your business's accounts receivable. You can track outstanding invoices, see when payments are due and monitor your cash flow, all in real-time.

Net 30 sets a clear expectation for customer payments. It communicates what you expect from clients, which helps avoid misunderstandings and disputes down the road.

A net 30 term also helps you better manage your accounts receivable and plan for upcoming expenses.

If you’re selling to another business, keep in mind that many companies have their own payment policies and may prefer net 30 terms because it provides flexibility for their accounts payable department. A longer payment window shows clients you trust them to pay you on time.

Finally, net 30 payment terms can help set you apart from competitors who may not offer flexible payment options. This can give you an advantage, especially if you’re a small business trying to stand out from the crowd. 

It can also encourage repeat business since customers are more likely to return to a company they trust.

One of the biggest drawbacks of net 30 payment terms is the risk of late payments.

When you extend credit to someone and accept payment later, there’s always a risk that some clients will take advantage of your generosity and won’t pay on time. You might end up wasting resources chasing down the payment.

If you want to continue working with slow paying clients, you might opt for a different term, such as immediate payment due on receipt. You can always revert back to net 30 terms later if you want.

Similarly, extending credit to new customers who haven’t proven their trustworthiness is risky. You might send out an invoice and never hear from that client again.

Another potential pitfall is cash flow problems for larger orders. Offering net 30 can leave you strapped for cash during the period between the sale and the payment due date.

Waiting on a big payment can grind your business to a halt, especially if you need that money to purchase supplies or inventory. In a worse case scenario, you may even need to borrow money or use credit lines to cover your operating expenses. 

Rachel Christian is a Certified Educator in Personal Finance and a senior writer at The Penny Hoarder. She focuses on small businesses, retirement, investing and taxes.