What Is a Net-30 Account? Definition and How It Works

Timely cash flow is crucial to running a successful business, and the payment terms you negotiate as both a vendor and a customer have an impact on your company’s revenues. One key factor in cash flow management is how much time the customer has to pay their bill. Businesses use the phrase “net 30” on invoices to signify that payment is due within 30 days.

Learn more about the meaning of net 30 and how using that payment period can affect your business.

What Is Net 30?

“Net 30” is a shorthand phrase used to indicate a payment deadline. It specifies that the client or customer has 30 days to pay an invoice. Net 30 is one of the most commonly used payment timeframes among small businesses in the U.S. Other options include net 15, 60, or 90.

Here’s a full net-30 definition, plus examples of how using net 30 compares to other options.

Net-30 Definition and Explanation

A net-30 payment term gives the customer 30 days from the billing date to pay the outstanding balance. (This credit arrangement with a customer is sometimes called a net-30 account.) Thirty days provides time to get the invoice approved and the payment issued by the client’s accounting team. Typically, a net-30 invoice refers to calendar days, meaning that weekends and holidays count toward the due date.

It’s important to be clear on when the 30-day period begins. Many consider the invoice date to be day one, but others believe the clock starts ticking on the date the invoice is received by the customer.

Either convention is acceptable, but it’s key to indicate clearly which one your company follows. This is especially important if you mail out your invoices instead of sending them electronically, as there may be several days’ difference between the day you send a bill and the day the customer receives it.

What does net 30 mean in practice? Let’s say your small business sends out all its invoices at the end of each month. In this case, we’ll say net-30 invoices are sent on October 30. The due date would be November 30, even though there’s a federal holiday during the month.

Comparison With Other Payment Terms

Though net 30 is a very common payment term, you may come across (or decide to adopt) other timeframes that affect your company’s cash flow.

•   Net 15: For a vendor, net-15 billing gets you paid faster. But clients may have difficulty executing payment so quickly, especially larger companies with multiple approval levels in place.

•   Net 60 or net 90: These longer terms can cause cash flow issues for a small business waiting for payment. Net 60 and net 90 are more common among larger companies.

It’s wise to calculate your cash flow, examine when your customers typically pay their invoices, and discuss payment terms with suppliers. That way you can figure out what net terms suit your small business.

Be sure your payment setup works with your business model too. Cash flow issues are a major reason for the high percentage of businesses that fail in their first five years.

How Net-30 Terms Are Typically Structured

As noted above, a typical net-30 payment structure has certain basic elements. A customer contract and invoice should explicitly state “net 30” and specify the starting date for the 30-day period. Provisions about late fees and penalties should be spelled out up front in the contract. Many businesses offer a discount for early payment; a common one is a 2% price break on invoices paid within 10 days (expressed as 2/10).

What Is a Net-30 Account?

A net-30 account is an agreement between a business and one of its suppliers or vendors about how long the business has to pay its invoices. “Net 30” means that the agreement is that the business will pay within 30 calendar days. If you have a net-30 account with one of your suppliers, it can significantly extend how long their bill can stay in your accounts payable before coming due.

How Net-30 Accounts Work

Obtaining a net-30 account is generally straightforward. You approach a vendor or supplier — often a company you’ve done business with and gotten along with — and tell them you’re interested in a net-30 account. If the company offers them, it will likely give you an application. After you’ve submitted it and the company has reviewed it, you may be able to take up to 30 calendar days to pay the company’s invoices.

Requirements to Open Net-30 Accounts

Every supplier and vendor that’s willing to agree to net-30 accounts can set its own requirements. But here are some things that many companies will ask to see.

•   Proper business registration

•   An Employer Identification Number (EIN)

•   Years in business

•   A dedicated business bank account and bank reference information

•   A business address and phone number

•   A D-U-N-S number

•   Annual revenue information

•   Business license (if applicable)

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Net-30 Accounts for Building Business Credit

Obtaining and responsibly using one or more net-30 accounts can help you strengthen your business credit history. As long as your supplier or vendor reports your use of your net-30 account to one of the major credit bureaus, paying your net-30 bills regularly and on time (or early) can help establish and/or strengthen your company’s credit history. This may help your business be considered a lower-risk and more promising applicant if you’re ever looking for a loan and could influence the rates and terms that you’re offered.

How Businesses Use Net 30

Businesses use net-30 payments in various ways, depending on how they operate best.

•   Cash flow management: Businesses often benefit by paying their vendors via net-30 terms, rather than immediately. That way, they can keep cash on hand for a longer period of time, making it easier to juggle other financial commitments and inventory.

•   Business credit: A net-30 account essentially serves as a free, short-term loan or credit line. If your vendor offers net-30 terms on an invoice, you can spread out your payments and escape the interest charges you’d incur by using a bank loan or credit card. And, as mentioned, if the vendor reports your payments to a credit bureau, having a net-30 account might help you build your business credit history.

•   Customer relations: If your business sends out net-30 invoices, the long payment term could potentially help you entice or retain customers.

Advantages of Net 30

The advantages of net-30 invoices vary, depending on whether your business is the buyer or the seller in the transaction. Here are a few aspects you might consider when determining whether to use net 30 with your customers or vendors.

Benefits for sellers include:

•   May attract more clients or customers: Net 30 is a favorable payment term that might not be offered by your company’s competitors.

•   Pushes December revenue into the new year: Collecting the debt a month later could lower the income you have to report on the current year’s IRS Form 941.

•   Allows you to add an early payment discount: Customers might settle up faster if you give them an opportunity to pay a little less.

Some potential pluses for buyers may be:

•   Extending cash flow: Having 30 days to pay a bill can ease the pressure of business purchases.

•   Scoring possible discounts for early payment: Lowering the overall cost of goods or services could increase your profit margin, everything else being equal.

When deciding on payment terms, weigh the importance of such factors, especially if you’re the seller. You’ll want to be sure the health of your company isn’t harmed by longer invoice terms.

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Potential Drawbacks of Net 30

Sometimes it can be a disadvantage for a business to issue net-30 invoices. Here are some possible situations.

•   Late payments can delay a closing date even further. Even waiting 30 days may create cash flow challenges. If there are issues, a small business loan or line of credit could be a fallback to help get you through the month.

•   Having to follow up on extended payment terms may slow down processing. Revisiting an outstanding bill could increase your business’s administrative overhead, whether it’s done manually or with invoicing software.

•   Early payment discounts could hurt your overall profitability. Make sure any discounts are comfortably within your profit margins.

Implementing Net 30 in Your Business

If you decide to use net-30 accounts for your business, communicate this payment information when you first engage a new client. You may not have the capacity for net 30 if you run a sole proprietorship or other type of small business, as you’ll want to make sure your cash flows easily throughout the month.

If you have standalone contracts with your clients, include all payment instructions in there as well. This makes your agreement more formal and gives you legal recourse if necessary. A contract is also a good place to cite any late fees you’d charge after the 30-day window closes.

You’ll probably also want to include these payment terms on the invoices you send. State directly on the invoice that payment terms are net 30, and be sure to include the due date so there’s no confusion.

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Tips for Managing Net 30 Effectively

With a net-30 payment period, you’re extending a free short-term loan to your customers. So, in your role as a lender, you may want to take some common-sense precautions. For example, you might vet your new and existing clients to confirm that their financials and business conduct are solid. You can set default payment terms for newcomers and apply them to existing clients too as needed.

Internally, it can be a good idea to monitor your business’s cash flow to make sure the 30-day payment period isn’t hampering your ability to cover costs. Consider using invoicing software that can help with cash management.

Clear Invoicing and Terms

To avoid misunderstanding, you may want to make sure each client invoice includes an invoice number, invoice date, the total amount due, a clear due date for the payment, and accepted payment methods. Use simple, straightforward language, and spell out consequences for late payments and any incentives for early payments.

Following Up on Late Payments

Even with a 30-day window, some clients may pay late. It’s smart to have a thoughtful follow-up plan in place so you can get paid and, if possible, salvage the relationship as well.

Typically you’d start with a cordial but clear reminder email just after the payment date. If a week elapses without a response, a firmer email or a phone call may be in order.

If nonpayment continues, you might want to pause any new or ongoing work, as providing additional goods or services to a nonpaying client would mean taking on extra risk.

If your client contract includes specific language about late payment penalties (and it should), those details are worth mentioning in later emails, along with negotiation terms you’d entertain. Failing any resolution, your options include collections or legal action.

Alternatives to Net 30

For added flexibility, you may want to think about certain variations on the net-30 payment term and/or other ways to leverage your invoices.

•   Early payment discounts: Along with the net terms on your invoice, you may want to give the customer a price break for paying the invoice early. Usually the discount is a small percentage of the total invoice amount. For instance, as mentioned earlier, the message 2/10 net 30 on an invoice means you’ll give the customer a 2% discount if they pay within 10 days of receipt.

•   End-of-month (EOM): An end-of-month term sets a due date that’s a certain number of days after the month is over. For instance, an invoice sent in July reading “Net EOM 10” would be due 10 days after July 31.

•   Financing options: If you’re a vendor who needs money soon, you may want to look into invoice financing. This allows you to use unpaid invoices as collateral for a loan. In a similar vein, you could also investigate invoice factoring, in which you tap into the value of outstanding invoices by selling them to a factoring company for a percentage of their face value.

The Takeaway

The payment term “net 30” is common on invoices in the business world. It means businesses receiving goods or services have 30 days to pay for them. This arrangement has pros and cons, depending on the details of your business. Before you start offering this option to clients, it can be smart to make sure you have the cash flow to support the slight delay in payment.

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FAQ

What does “net” mean in “net 30”?

“Net” is business shorthand for the total final amount that is owed for a purchase after all discounts, expenses, or other deductions are accounted for. So for a net-30 invoice, that final amount must be paid in full within 30 days.

Can net 30 terms affect business credit?

Yes, net-30 terms can affect business credit. If your suppliers invoice you on a net-30 basis, your business gets what amounts to a no-cost one-month loan. That frees up cash for paying other bills during the month and may help you maintain good credit. When you offer net-30 terms to your customers, though, you’re providing them with the free loan, essentially financing their payments for up to 30 days. If that leads to a cash crunch for your business, you could fall behind in payments and your business credit could take a hit.

Do all vendors offer net-30 terms?

Not all vendors offer net-30 terms. Payment terms are based on the vendor’s policies and the nature of their business. Some vendors may prefer shorter terms like net 15, while others might offer longer terms like net 60 or net 90.

How do you offer net-30 terms as a small business?

If you decide to offer net-30 terms for your small business, you’ll want to communicate that billing information clearly to all clients. Include net-30 payment terms in contracts where appropriate, and put “net 30” on the invoices you send. To avoid confusion, it helps to specify the due date as well. Cash flow issues may be less likely if you ensure that your incoming and outgoing payment schedules align.

What are the best Net-30 accounts for building business credit?

To build business credit, you’ll want to be sure that the company providing you with a net-30 account reports your transactions and payments to one of the major business credit bureaus.

What’s the difference between net 30 and 2/10 net 30?

The difference between net 30 and 2/10 net 30 involves a discount for prompt payment. With net 30 the customer has 30 days to pay the full amount on the invoice. With an invoice marked “2/10 net 30,” the customer can take a 2% discount if they pay within 10 days of the invoice date. If they don’t, the full amount is due within 30 days.

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