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Net 30

In examining the term Net 30, it will be insightful to look at the following closely related terms:

  1. Payment Terms 
  2. “Net 30” vs “Due in 30 Days”
  3. 5/10 Net 30 

Each of these items above is related to the management of a company’s receivables. When a transaction occurs, there is an invoice issued to indicate that a purchase or sale has been carried out. 

In this review, we are looking at the sales component as this gives rise to the management of debtors and/or receivables. When a sale is made, the customer has the option to pay in cash or take advantage of the credit option. While the credit option might not be extended to every customer, it is a regular feature of every business, and it will necessitate looking at the terms of payment that governs the transaction.

 

Net 30 Defined

Net 30 is the payment period specified for a customer for the payment of an invoice issued for a transaction. There are different payment periods that a business might allow each customer depending on the profile credibility, cashflow or business process involved.

An invoice might be Net 10, Net 20 or Net 30, and this indicates that the customer has to pay the value of the invoice (less discounts) within the number of days attached to it. The customer has to understand that a failure to make payments within the specified days will lead to additional finance charges or penalties.

Net 30 indicates that the customer has 30 days to pay the invoice value as stated less any discount that is indicated. 

 

Payment Terms

Payment terms govern every invoice issued and indicate the payment period, discounts attached as well as any other likely terms and conditions for a transaction.

Any failure to indicate payment terms for a transaction means that the likelihood of getting paid will be imperiled. It is important to communicate to customers when an invoice payment is expected so that any ambiguity is avoided. Other indications like the method of payment and penalties for late payments also need to be clarified.

Before a business spells out payment terms for an invoice, there is a need to have a clear understanding of the impact on cashflow, receivables’ management and overall corporate credit health.  The clearer, more consistent, and concise your payment terms are, the more the likelihood that invoice payments will be certain and the cashflow will be predictable.

Poor payment terms specification will ultimately cause a business to fail when bad debts pile up and the capacity to meet short-term liabilities is imperiled. Understanding the profile of each customer is important so that the payment terms that best match each case is applied. In some instances and depending on the nature of the business, a standard set of payment terms might also be necessary.

When drafting the terms and conditions for payments, the help of an attorney might prove useful to hedge against possible litigation. It is always best for information to be provided on product or service cost, carriage or delivery procedures, data collection and protection as well as penalties for delayed payments.

Every business is expected to have payment options which should be specified for every standard contract or transaction. 

Terms and conditions are likely to cover:

  • The specified window for raising disputes with regards to a transaction
  • The retention of beneficial ownership until payment is made by the customer
  • Possible set-off against other transactions ( i.e., a customer can render services instead of a remittance for a debt or an invoice due for payment)
  • Situations that can lead to a breach or termination of a contract. 

As a business owner, it is your duty to bring your terms and conditions for settling an invoice to the knowledge of your customers, so that they can agree to it.  Terms and conditions can be printed underneath or behind an invoice, on delivery notes or on any other form of contract. 

 The preferred time to communicate your terms and conditions is before a business relationship commences.

 

“Net 30” vs.“Due in 30 Days”

“Net 30” and “Due in 30 Days” are terms used for credit transactions.

When an invoice states that payment is “Due in 30 Days”, it means that payment of the invoice value has to be made within 30 days of its issue.

“Net 30” is used to communicate to a customer that payment of an invoice value less any agreed discounts has to be made within 30 days of completion of a transaction or shipment of goods  irrespective of work-free days or holidays. 

As an incentive to customers, a business might specify a discount if payment of an invoice occurs within some specified days before the payment period expires.

 

What is 5/10 Net 30?

5/10 Net 30 is an incentive to the customer that specifies that a 5 percent discount is available if the invoice value is paid within 10 days of issuance of the invoice. If the customer fails to pay within the 10 days specified, then the full invoice value has to be paid within the 30 days payment period.

When a condition such as ’5/10 Net 30’ is added to an invoice, it is an indication that the business desires to boost its liquidity or enhance its cashflow efficiency. The management of receivables is vital for business survival and has to be given the needed attention to avoid liquidity troubles.

It is important to point out that every business must understand its cashflow requirements, and clear words must be used when issuing invoices to avoid confusion. Discounts can be utilized to boost liquidity, and anything between 1% and 10 % might be considered sufficient.

Other incentives to boost collection of receivables include gift cards, extended payment period, further discounts, and complementary services. 

Companies that offer their customers a chance to explore more payment options have a better payment period compliance. Online payment options like Stripe and PayPal can be added to traditional options like cash, checks, bank deposits and money transfers as a payment incentive.

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