Understanding Net Payment Terms

Net payment terms refer to the timeline and conditions that dictate when a customer must pay for a purchase. Setting clear net payment terms is an important part of financial management for any business that offers credit sales. Common net payment terms include Net 30, Net 60, and Net 90, which give the customer 30, 60, or 90 days respectively to pay an invoice in full.

Determining suitable net payment terms requires balancing what is financially sustainable for your business with what will satisfy customers. There are advantages to offering more flexible longer terms, but also risks inherent in waiting for payment. Understanding typical terms in your industry, your customers' payment history, and your own cash flow needs will enable you to make an informed decision.

Benefits of Net Payment Terms

Allowing Customers Flexibility

Net payment terms empower you to extend flexibility in payment timelines to customers. Setting expectations with standardized net 30, 60 or 90 day terms can attract business from customers who need more time to pay than immediate payment. Especially for large purchase amounts, giving 30-90 days for invoices to be processed and paid improves the customer experience.

Appealing to Larger Business Clients

Large companies often have long invoice processing and payment procedures, requiring approvals across multiple departments. Typically, large business clients cannot pay invoices on-demand and will be drawn to suppliers that offer clear net 30, 60 or 90 payment conditions that accommodate their accounting workflow.

Enhancing Customer Loyalty

Presenting customers with the option of longer payment durations demonstrates you understand business constraints and are willing to create a positive payment experience. Customers greatly value flexibility and convenience from suppliers. Net terms help position you as an empathetic partner dedicated to your clients.

Gaining Competitive Advantage

Within industries, business suppliers often compete to offer the longest or most relaxed payment terms. Presenting clear and even slightly looser timeline expectations in proposals can help win business against other providers. Lead with payment terms that give you a competitive leg up.

Risks of Offering Net Payment Terms

Potential Cash Flow Issues

Extending any business credit line exposes you to cash flow interruption if customers do not comply with payment terms. Offering net 30 instead of due-on-receipt objectively delays cash inflow by 30 days. To sustain operations reliant on steady cash must account for not having invoice payments readily available.

Burdensome Tracking & Administration

The more open business credit you extend, the more critical the tracking and administration of outstanding payments and receivables becomes. With lengthy terms, managing high volumes of unpaid invoices to ensure customers remit payments on-time takes concentrated internal bandwidth.

Risk of Late Payments

No matter how strong your payment term language or enforcement policies are, offering net terms inherently carries risk of customers paying invoices late. Businesses fail to pay on time for many reasons - oversight, cash flow issues, disputes over service/product quality, or even insolvency. The risk compounds the longer terms you provide.

Potential for Non-Payment

Besides late payments, another real risk is non-payment - customers never paying invoices at all. Attributing slow payment to temporary business factors can make it hard to determine when a delinquent account becomes uncollectible. Non-payments often must get escalated for collection to have hope of recovering amounts due.

Opportunity Cost of Extending Credit

Tying up money in outstanding invoices restricts you from investing capital into other profitable business activities. If you can afford to offer net payment terms, assess whether collecting and keeping cash on-hand enables more opportunities. Evaluate tradeoffs of offering terms versus self-financed growth or operations.

Setting and Managing Net Payment Terms

Industry Standard Terms

Identifying typical net terms in your specific industry provides an expectation of norms and competitive standards. Most industries settle around offering net 30, but some support longer 60 or 90 day arrangements. If your niche commonly works with net 60, resisting shorter periods prevents limiting prospects.

Client History & Risk Profiles

Not all customers should receive standardized terms. Analyze the payment history and perceived risk profiles of existing clients to guide term decisions. Offer safer payers - say with 2+ years of prompt payments - more latitude in payment timing. Higher risk profiles based on history of very late or missing payments should face shorter terms.

Business Cash Flow Requirements

The length of payment terms you can sustainably provide comes down to your business’s cash flow profile. Examine your income schedule and outgoing expenses to guide appropriate terms. If you rely heavily on sales volume or have larger fixed overheads, net 30 or 60 helps ease strain compared to due-on-receipt terms.

Size of Invoices or Transactions

Invoice-by-invoice factors like total purchase amount also matter for term length decisions in addition to general customer traits. For example, a reliable customer making a uniquely large one-time equipment purchase may appropriately get longer terms than that same customer’s typical monthly order of disposable supplies.

Conclusion & Best Practices

Net payment terms impact customer experience, competitive positioning, administrative workload, and business sustainability. Select terms thoughtfully, not just based on industry convention. Set expectations clearly in contracts and invoice documents clients must sign. Enforce through late fees, discontinued terms on future business, collections and legal action if necessary.

Standardize terms on a customer-by-customer basis but remain open to exceptions for unique situations. Weigh benefits against cash flow timing and risks - adjust if you encounter issues. Monitor customer payment patterns continually to limit risk from offering terms. With diligence, net payment terms enable you to operate on your terms while keeping customers satisfied.