If your business buys, sells, or carries inventory, then it certainly deals with invoices, too. But invoice payment terms aren’t always easy to understand. So in our quick-but-comprehensive guide to invoice terms, you’ll get answers to all your questions, from “what does net 30 days mean” to “what’s a cash discount”.
What are invoice payment terms?
Invoice payment terms articulate precisely how a seller or service provided expects to be paid. These payment terms usually indicate not just when, but how a business should receive payment.
For example, a business may indicate they’d like to be paid immediately, net 30, net 60, or even net 90. And the seller or service provided may also indicate whether they’d like payment via cash, check, credit card, wire transfer, or some other method. If a cash discount is offered, that’ll usually be printed on the invoice, too.
Typically, terms are summarized directly on an invoice, although there may be additional terms and conditions, such as financing charges for late payments.
What are net terms on an invoice?
On an invoice, net terms indicate exactly when a seller, service provider, or supplier must be paid in full. Typically “net” is followed by a number, which refers to the number of days you have to pay the invoice (for example, net 30 would mean 30 days). Sometimes, a business will use shorthand on invoices, using the letter “N” instead of the word “net”.
Some invoices are sent out on a certain day of the month. Other times, they’re sent every time a delivery is made. Whether you work with suppliers, are a supplier yourself, or both, you should be aware of when and how frequently your supply chain partners invoice you.
What is “net”?
“Net”, when used on an invoice, means “full.” In other words, if you see the word “net” next to invoice payment terms, your supplier expects full payment.
Popular invoice payment terms
While businesses are free to set unique invoice payment terms, most companies choose popular, widely-accepted payment terms. Here’s a bit more about them.
So, what does net 30 mean? This ultra-common payment term indicates that the buyer has 30 days to pay the invoice in full. On average, that gives companies about a month to process and pay a net 30 invoice.
Why is net 30 the most common invoice payment term? 30 days is a happy medium. It offers customers a short, reasonable line of credit, while ensuring the seller gets paid within a month or so.
Not all businesses have cash at the ready, so giving cash-strapped companies a little bit of time to pay for purchases is an attractive option.
What does net 60 mean? Like net 30, net 60 announces that a buyer has 60 days to pay an invoice fully. That’s about two months, give or take.
Less popular than net 30 or net 60, some companies do set net 90 terms. Net 90 indicates that a buyer has 90 days (about three months) to pay an invoice fully.
1%/10 Net 30
What does 1%/10 net 30 mean? It’s the first invoice payment term on this list that’s not even a little self-explanatory. If you see “1%/10 net 30” on an invoice, your seller offers you a 1% discount if you pay the invoice within the first 10 days. Otherwise, the full price will be due in 30 days—standard net 30 terms.
Why set 1%/10 net 30 terms? A seller incentivizes prompt payment for a small discount, improving their company’s cash flow. This matters most to businesses that don’t have much cash on hand or that don’t have access to a decent revolving credit line.
Sellers that offer 1%/10 net 30 terms should display both the discounted amount and the standard amount due on their invoices.
1%/10 Net 30 example
If an interior designer sends a bill to a client for $10,000, the designer may set 1%/10 net 30 terms to help get some more cash back into their business sooner. The client has the option to pay $9,900 dollars within ten days, or pay the full amount ($10,000) from days 11 to 30.
Incentives like these are called cash discounts—even if there’s no cash involved. Cash discounts are (usually small) discounts that motivate buyers to pay bills right away, providing the seller with “cash” a bit sooner.
While a 1% cash discount is standard, some sellers may offer 2% or even more of a deal. And sometimes, sellers set a flat-rate cash discount, such as $25 off—regardless of how much a customer spends.
Due on receipt
Another term you might see on an invoice? Due on receipt. This particular term is often unrealistic, but businesses may set such parameters anyway, hoping they incentivize customers to pay right away.
Vendors may also set “cash only,” “due on receipt,” or “due at delivery” terms to customers who’ve violated payment terms or had payment issues in the past.
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Setting invoice payment terms for customers, suppliers
Setting invoice payment terms might seem simple, but it’s really a delicate balance between your business’s cash flow and that of your customers. Businesses operating on thinner margins tend to favor longer payment terms, whereas companies that are flush with revenue might look for cash discounts from vendors.
If you’re a supplier, talk to your accountant or business manager about what invoice payment terms are best for your cash flow. And if you’re a customer, don’t be afraid to talk to your supplier about cash discounts or extending payment terms.
While there’s not always flexibility, your suppliers might be able to make an exception, provided your account is in good standing. While most suppliers won’t change payment terms, adjusting payment terms is usually simpler than adjusting other requirements, such as minimum order quantity.
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