Working Capital Management
Net 30? Everything You Need to Know but Were Afraid to Ask Clients for
Put simply, the credit jargon ‘net 30’ means full payment for your product or service, due 30 days from the completion of the transaction. Think of how your classic retail store charge card works. However, a net 30 client typically gets a discount if they pay before the 30 days are up. You and the client determine the specifics ahead of time.
It’s important to be accurate in finance. Net 30 means, exactly 30 days and not ‘business days’ (aka Monday to Friday). These days, frankly, every day is a business day!
The good news about net 30? It’s not all bad news! If clients are offered a discount for payment before the 30-day limit, they’re motivated to pay sooner. And by offering net 30 in the first place, you’re encouraging them to do more business with you.
A lot of small businesses hate net 30 but, more and more, big clients expect it.
And no wonder: net 30 is a sweet deal for any client, big or small. Functionally, net 30 is an interest-free loan to your clients made generously by the Bank of You.
But why do those big clients make you wait for work you’ve completed? It’s hardly fair. After all, you pay for your burger and fries as soon as you get them, don’t you? Imagine not having to pay HBO until 30 days after you’d watched Game of Thrones, Season 8. If you’re at all like some of the Elf-Lords and Intergalactic Warriors of Light who work here in our office, you’d be in no hurry to pay. There’s a reason the vast majority of commercial transactions are completed at the time goods are received. The buyer is still motivated.
Considering entering a net 30 relationship? Be specific or beware!
In a business relationship between equals where both parties need each other, you would feel entitled to sting net 30 clients with a hefty charge for paying after 30 days. Again, think of how your classic retail charge card works.
But if you’re a small business, the relationship may not be equal. (And if you found this article by searching ‘WTF is net 30?’, we’re assuming you’re still an aspiring Fortune 500 robber baron.) You may as well charge stinging interest charges for late payments on unicorn riding lessons.
Still, just politely mentioning late fees while invoicing does a lot to promote on-time payment. It doesn’t always work but neither does it hurt. Just being polite goes a long way too. So, include ‘please’ and ‘thank you for your business’ on your invoice. It’s just good business.
Let’s review. Net 30 means payment-on-or-discount-before 30 days.
Likewise, net 60 means 60 days, net 90 means 90, and so on. Believe it or not, many huge enterprises expect and even build their businesses on these dreadfully long payment terms. We don’t suggest offering them to new clients but if you’re invoicing for something like a government contract, you may not have much choice.
Indeed, before you agree to a net anything agreement with your client, spell out the details. Stagger discounts to encourage payment sooner.
Rather than writing ‘discount for early payment’, be specific. For example, if it’s net 30, state something like ‘10% discount if paid before day 10’; ‘5% discount if paid before day 20’ and so on. And don’t be afraid ask for late-payment terms. If they sign and agree to the deal, well, well done!
Net net? Net 30 is not a dirty word.
Or to be accurate, which is important in finance, net 30 is not a pair of dirty words. Certainly not as dirty as net 60 or net 90.