Have you ever received an invoice that had the term net 30 written on it? It sounds like a basketball play, but unfortunately, it’s a little less exciting than that (think less Michael Jordan and more Mark Cuban). Simply put, net 30 is a credit term for businesses and clients to clarify when the payment is due for goods or services. It’s a pretty common practice, but is it a smart one? Let’s take a look at exactly what net 30 means and how it can be used.
What Does Net 30 Mean?
In the business world, net days is a fancy term for the number of days you have to make a payment. So, net 30 means 30 days until the payment is due. It’s a term you’ll typically see written on an invoice after you’ve received the product or service, but it can also pop up in contracts.
Technically, there can be any number of net days, but businesses typically choose a 30-day deadline, which is how the term net 30 came to be so popular. Net 10 and net 60 are also pretty common.
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So, what’s the difference between net 30 and payment due in 30 days? Honestly, not much. But it can get a little more complicated when businesses open net 30 accounts with their vendors.
How Does Net 30 Work?
Let’s say you ordered hundreds of pamphlets for an upcoming event. You typically wouldn’t prepay for something like pamphlets because you’d want to see them first and make sure they’re printed correctly. Enter a net 30 agreement. After you receive the pamphlets (and approve of how they look), the printing company gives you an invoice that includes the term net 30—making it crystal clear they expect you to pay for those pamphlets within 30 days.
When Do the 30 Days Start?
That’s something you’ll want to discuss before you make the order. Net 30 could mean 30 days after the sale is made, or it could mean 30 days after the product is delivered. It just depends what you and your vendor decide. And it’s important to note that net 30 applies to calendar days, not business days.
What Is a Net 30 Account?
A net 30 account allows you to buy now, pay later. That means it works just like—gasp!—a credit card. In fact, net 30 accounts are commonly referred to as vendor credit, supplier credit or trade credit. Some vendors even report those payments to commercial credit agencies so that businesses can establish credit scores.
Now, normally we try to stay far away from anything that works like a credit card, because things tend to go south when you receive items before you pay for them. A net 30 account is technically a debt account, and debt is dumb. But with something like those pamphlets, a net 30 account makes sense. You just have to plan ahead and make sure you have the cash to cover it.
It’s easiest to think of net 30 like your electricity bill. You live in the house for the month of January, but you won’t pay for the electricity used in January until February. When you get the bill, you have 30 days to pay or your power is shut off. Even though your electricity costs may vary from month to month, you should have enough money set aside in the budget to cover the expenses. The same goes for your net 30 accounts.
Does Net 30 Make Sense for My Business?
Net 30 can be a useful tool for many products and services, but you need to fully understand what it means and how it would work well for your business.
If you’re offering net 30, you’re saying that you’re okay with delaying your paycheck (or at least your business’s paycheck) for 30 days. Also, remember that a net 30 is a type of contract, and contracts are only as good as the people who sign them. Will your business survive if your clients are late with those payments?
If you’re working with vendors who offer net 30, you have to use common sense. Don’t buy more than you can afford, and make sure the purchase fits in your 30-day budget. Don’t order stuff and hope that you can sell it off fast enough to pay the vendor—that would be planning debt and riding on the back of your vendors, and that’s not a smart move. If you don’t have the money, don’t order the stuff!
If you’re looking for someone to help you grow your business and work out the fine print for getting paid, we can help! EntreLeadership Elite offers training and customized plans to help you win with your business. You can reach out to one of our advisors to learn more.