For the most part, small business owners and freelancers are not trained in accounting, so when they have to deal with accounting language on their invoicing, it can be difficult.
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The most common invoicing payment term is Net 30, which is used as standard on many business invoices.
However, there are also many other types of payment terms that can appear on invoices that you may not be aware of.
That’s why today we’ll look the most important invoicing payment terms, not just Net 30, but also Net 60, 1/10 Net 30 (1/10, n/30), Cash on delivery and many more.
Table of Contents
Before we dive into what the full implications of these terms are, including their advantages and disadvantages, let’s quickly look at what they mean.
I. Net 30: An In-Depth Look
Net 30 is an invoicing payment term used commonly in the business world, where the 30 refers to the amount of days that your client has to pay the outstanding invoice.
Variations: net 7, net 10, net 60, net 90
Technically, net 30 is a short-term credit that the seller extends to the client. The job or service is already completed, but the client hasn’t paid yet.
Instead of asking for the money immediately upon completion (or before), the client has 30 days to pay. Transit time is included in the 30 days, so if something takes a week to ship, the customer has 23 days left to pay.
While this may seem common for small business owners and freelancers, imagine how this would look in retail or dining.
Let’s imagine that you take a pair of shoes from the shop and instead of paying first, you try to convince the retailer to take the payment after 30 days.
Or you finish eating your meal, get up and tell the restaurant owner that they can expect payment sometime within the next 30 days.
That’s probably not going to happen (although credit cards do work in some similar way, as you’re essentially paying the credit card company long after you’ve bought the item).
Net 30 is a standard in the business world and also common with municipalities. For example, in the UK, the client has a legal obligation to pay you within 30 days unless otherwise agreed.
Advantages of Net 30
The advantages of net 30 can seem quite obvious. With this short-term credit being extended to the client, you are providing an incentive for him to use your services or purchase your products.
People (companies included) are more willing to purchase goods or services if the payment for those purchases is delayed. This is perhaps why 20% of Americans use their credit cards for everything.
As opposed to credit cards, however, net 30 credit sales come interest-free.
Larger corporations prefer net 30 (or longer terms) to hold onto cash longer for accounting purposes. By delaying cash outflows, they can improve their cash flow, which helps them meet their regular financial obligations.
Disadvantages of Net 30
The disadvantages for Net 30 payment terms depend on what your business size is.
If you have a good-sized business (for example, medium-sized or larger), you will have enough cash inflow to stave off any of the negatives associated with net 30.
With many resources and revenue streams, those types of businesses have enough incentive to keep their clients on net 30 payment terms.
However, for small (or micro) businesses and freelancers, net 30 can be a trap. One important thing to consider is that clients may have differing opinions of what net 30 actually means.
Some may believe that the 30 days begin from the date the invoice is received. Others may think it is from the date the invoice is issued, while you (and others) may believe it starts when the work was completed or the goods were delivered.
Beyond that, especially for freelancers, net 30 could even mean the period begins after your client has invoiced their client. This happens a lot, and often so without the supplier’s knowledge.
With short-term credit extensions, small/micro businesses and freelancers are in danger of not having enough leverage to have their invoices paid.
This means that they will have to continually extend credit, in such a way that net 30 can become a net 60, 90, or even net 365.
Therefore, these smaller businesses can get stuck in a trap of having to work for essentially no pay for possibly a long time.
How to Avoid Net 30 Problems
There are a few ways to avoid the problems associated with net 30 payments.
1. Shorten payment terms
One is to shorten the days that the invoice is due, from 30 to 10 or 7 (there’s also the option of net 15 or net 21). However, while this means you are expecting your money faster, it also makes it more difficult and gives less room for your clients.
If you are in a competitive market, where you are one of many vendors, having short payment terms might disqualify you. This is important to remember.
2. Include penalties
For the most part, without any sort of punishment, your clients won’t have any real incentive to pay you on time.
That means that, primarily, you’ll have to include a late fee on your invoices if those invoices are paid after the due date. If your client objects to any sort of late payment charges, then this is normally a sign of a pending troublesome situation.
3. Don’t give Net 30 to new clients
Another way to protect yourself is to inform your new clients that you can only extend Net 30 to clients you have a history with.
If there is no dependable history here (where you can see the client’s willingness and ability to pay on time), then you’ll have to ask for payment upfront or at delivery of goods or services.
II. 2/10 Net 30 And Other Discounts
Related to Net 30 above is the trade credit where customers can receive a percentage discount if they submit payment within a shorter time frame. If not, the normal terms apply.
So, for example, in 2/10 Net 30 (also written as 2/10, n/30)—if the customer pays within 10 days, he/she will receive a 2% discount. If not, then he/she will have to pay the invoice within 30 days.
Variations: 1/10 net 30, 2% 10, net 40 (or 45, 60), etc.
Normally, whenever a credit term (net 30) is extended, it is normal that the company will also offer a discount to motivate clients to pay earlier.
When a business uses the structure x% discount within y days or full payment in z days, what the company is really saying is straightforward:
It is more important to have payment as soon as possible than to have the full payment. The company is willing to give a lower price in order to have cash more quickly.
Therefore, this discount helps both sides: offers a discount for the client and helps speed up cash cycles for the company.
Let’s look at an example of a 2/10 net 30.
Imagine a company sends an invoice to its client for $10,000. If the client pays the invoice within 10 days, the total amount is only $9,800 rather than $10,000, because of the 2% discount.
If the invoice is paid after 10 days and before 30 days, the invoice total is $10,000. Therefore, it would benefit both sides if the client pays within the first 10 days.
Advantages of 2/10 Net 30
The advantages here are pretty easy to see. The client has the advantage of being offered a lower price for the same product or service.
The supplier gets to have its invoice paid much more quickly, which is very good for its cash flow.
Disadvantages of 2/10 Net 30
The disadvantages here are small for the seller. It is sacrificing 2% of the invoice amount, which is nonetheless an amount that it is not being paid for services rendered or products provided.
Of course, this is more than offset by the benefits of having speedier cash cycles.
For the client, there is high incentive to pay early. However, for small companies with low cash and an exhausted line of credit, paying early could be dangerous.
If the client doesn’t have sufficient funds, it could lose the trust of the seller, who could then eliminate the net 30 terms completely.
That would mean that payment would be due as soon as products or services are delivered, which could be devastating for small businesses with low funds.
III. Cash invoice terms
There is another form of invoicing terms that does not particularly extend credit to the client. These I will collectively call cash invoice terms, as they require the client to provide cash before the order or upon delivery.
Variations: Cash on delivery, Cash before shipment, Cash in advance (Payment in advance), Cash with order
We’ll go through each variation and see what they offer, benefits and disadvantages.
1. Cash on Delivery (COD)
This is a type of transaction where the customer has to provide payment when the goods are delivered. If no payment is made, then the goods are returned to the seller.
Payments are normally made in cash, money order, or other agreed upon payment method.
This type of transaction is very common for import/export industries, as it reduces the risk of fraud or default. In this way, the client gets to inspect the goods before submitting payment, and the supplier receives payment or the goods are returned.
Advantages of Cash on Delivery (COD)
The advantages of COD purchases are great for consumers with credit cards, as they minimize the risk posed by scammers online. With the payment only required when the client can actually inspect the goods, the customer can decide to pay or not pay.
For the seller, the COD payment is great for business as it can enhance buyer confidence.
No payment is required upon ordering, and the customer is confident that if he does not like the product, he can simply refuse to pay for it. That’s great news for new businesses.
Disadvantages of Cash on Delivery (COD)
For the customer, there is a slight disadvantage as the chance of making unwise purchases is greater because the payment is deferred until the product is actually delivered. This can lead to impulse buying.
For the seller, there is a natural risk with the customer possibly refusing to pay. If that happens, the seller has to carry the costs of shipping the returned items.
2. Cash in advance (Payment in advance, Cash before shipment, Cash with order)
There are actually three variations with this type of transaction. Instead of the COD structure mentioned above, the client actually has to pay in full before the goods are even shipped.
These types of payments are commonplace for import/export and online retailers (Amazon, etc.), where the customer is submitting payment before he receives the goods.
Payment is normally made with credit cards, wire transfers, or PayPal (and similar), with further payment options becoming more available.
Cash in advance (CIA), or payment in advance, is a rather general term that may imply that the payment is due after the order is placed but before the goods are shipped. This can also be known as cash before shipment, although that is a less popular term.
On the other hand, cash in advance could imply something closer to cash with order, which means that the cash is due immediately when the order is placed (more common for online retailers).
In actuality, this is more like a credit extension from the customer to the supplier, as the goods are not being shipped yet.
Advantages of Cash in advance
There are no particularly strong advantages for the customer with cash in advance transactions.
For the seller, the credit risk and non-payment risk is eliminated since the seller will receive payment before sending the goods to the customer. This is great for cash flow and can boost business significantly.
Disadvantages of Cash in advance
This is not great for the customer. It requires the customer to put money upfront before even inspecting the goods for errors or quality. It can also create cash-flow problems for import/export businesses.
In these ways, the customer always prefers other transaction methods rather than cash in advance, and in a competitive market, the seller will have a difficult time if his competitors offer better terms.
Furthermore, many foreign buyers are hesitant to buy goods before they are even able to see it and are more likely to choose better terms, such as COD.
IV. Quick Definitions of Invoice Payment Terms
These are the most common net 30 and other invoice payment terms.
The seller extends a 7-day credit in which the invoice has to be paid, interest-free. This is a particularly short, non-standard extension.
The seller extends a 10-day credit in which the invoice has to be paid, interest-free. Here, while there is an extended credit that acts as an incentive, it is still quite short.
The buyer has 30 days to pay (often from the date the goods or services were delivered, or the date of the invoice), interest-free. The standard credit extension used by most small businesses and freelancers, which is a strong incentive for the buyer to use the particular supplier in the first place.
The buyer has 60 days to provide payment in full to the seller. This payment term is most commonly used by larger businesses that have many different revenue sources to have payment delayed by two months.
It allows buyers to get sales revenue before they have to submit payment to the seller.
The buyer has 90 days (3 months) to submit payment to the seller, interest-free. This is for larger businesses that have many different revenue sources to offset delayed payment by its clients.
As with net 60, it allows buyers to get sales revenue on goods before they have to submit payment for the goods to the seller.
1/10 Net 30
A discount term for early payment. The customer gets a 1% discount if payment is made within 10 days. If not within 10 days, the payment should be made in full within 30 days.
2/10 Net 30
A popular discount term for early payment. The customer gets a 2% discount for payment made within 10 days. If not within 10 days, the payment should be made in full within 30 days.
Cash on delivery
A popular import/export transaction method, the customer only submits payment for goods when the goods are delivered. The customer may deny payment, which means that the goods are returned at the seller’s expense.
Cash in advance
Before the goods are shipped (or often ordered), the customer has to provide payment in full. This is more risky for the customer. Also known as Payment in advance.
Payment in advance
Before the goods are shipped (or often ordered), the customer has to provide payment in full. This is more risky for the customer. Also known as Cash in advance.
Cash before shipment
Specifically, this transaction requires that payment be made before the goods are shipped, but after they are ordered. Most of the risk falls on the customer.
Cash with order
This transaction method requires that payment be made before the goods are even ordered, which is technically a credit extension by the customer to the seller. This is more risky for the customer.
These invoice payment terms can be crucial for your business, depending on the transaction methods that you choose.
While some of these are optional, depending on your industry (such as COD or CIA), others are standard, such as Net 30.
However, many small businesses are not aware that Net 30, although standard, isn’t mandatory. Therefore, they can extend it to Net 60 or even Net 90 if that is more convenient for them.
However, they can also swing the other way by shrinking it to Net 21, 15, 10, or even 7.
These do bring in their own advantages, but as with the rest of these invoice payment terms, they have their own drawbacks as well.
The longer the net days allowed for payment, the more incentive the customer has to use your services.
Of course, the longer your payment is delayed, the worse it is for your cash flow and, if you are a small business owner or freelancer, you could face difficulties in staying afloat.
The most important thing in determining which payment terms are best for your invoicing is to look at your company structure, revenue streams and cash flow and take those into account.
With the proper invoice payment terms, however, you’ll see increases in your sales, cash flow, and business overall.