Net terms are a type of accounting payment terms, or rules for payment imposed by suppliers on their customers. The “net” in net terms means that the full amount billed on an invoice is due for payment within the days specified; it is often written as Net-D where the “D” represents the days to fulfill payment. For example, net-30 means the net amount, or entire amount billed is due 30 days from the date of receipt of the invoice.
Payment terms, including net terms, can vary depending on contracts and conditions set forth during procurement of the supplier. Payment terms are imposed to ensure timely payment of suppliers, and also help businesses predict their company cashflow with a stable income schedule. Net terms are forms of credit which specify the net amount (or total outstanding on invoice) is expected to be paid in full. The most common net terms are:
- Net-10: Outstanding balance is due 10 days after receipt of invoice
- Net-15: Outstanding balance is due 15 days after receipt of invoice
- Net-30: Outstanding balance is due 30 days after receipt of invoice
- Net-60: Outstanding balance is due 60 days after receipt of invoice
Net-30 terms are used by most businesses and federal, state, and local municipalities. Net-10 and Net-15 are the next commonly used, especially by contract and service providers. Net-60 terms are less frequently used as it is considered a long time period to go without payment.
“Net” means the total after all discounts are applied; discounts are sometimes included in the payment terms negotiated during procurement. Such terms are referred to as discount terms. Examples of this include 2/10 Net 30, which means that a 2% discount on the total invoice is applied if payment is made within 10 days of receipt; otherwise, the full balance (without discounts) is due within 30 days of receipt of invoice. Discount terms are usually negotiated by suppliers with large accounts or good customers.
Payment terms are important because they can help businesses and organizations ensure steady cashflow — ensuring the have adequate cash and to satisfy expenses and obligations. Payment terms can make sure that cash flows in at a predictable rate, thus helping budgeting and forecasting. To set a useful schedule, it is important to set clear expectations and communicate explicitly terms and conditions of payment.
Best practices to write effective invoice payment terms include:
- Clear and polite wording: First, the terms of payment should be clearly communicated and explicitly stated. In addition, it helps to include friendly language that can increase the likelihood of on-time payment (ex. Kindly pay your invoice within 10 days).
- Itemized layout: A detailed description of dates, goods/services, price per unit, and total price can make it clear what the invoice is for and what is being paid, increasing the chance of on-time payment.
- Use terms like days due instead of net: Vague terms like “net” or “due upon receipt” can be confusing and lead to late payments. Try to use clearly understood terms, such as “due in 60 days”.
- Late payment consequences: Invoices should state the penalty for a late payment; this can help ensure on-time payment.
Short payment terms: If you can negotiation shorter payment terms with clients, it can ensure faster cashflow and adequate working capital for the business.
Source: Accounting Payment Terms (Accounting Tools)