Many freelancers, entrepreneurs, and startup founders believe that by delivering a service (or selling a product), they have completed the transaction and the funds are immediately available in their bank account. In their mind, they have almost spent it when it turns out the invoice is not immediately payable.
Net 30 on an invoice refers to the payment term that must be agreed upon in advance between the parties. In this article, we will talk about payment deadlines, the importance of a prior agreement, and why this is important in the life of a freelancer or entrepreneur.
What is a net 30 on an invoice?
In short, the term means that the time limit for payment of a properly created invoice is 30 days. This can also be interpreted as a 30-day credit period because even though you have already delivered, your customer has one month to remit payment to you. This is why having a net 30 on an invoice can assist you in having a stable cash flow for your business.
Why do I need a net 30 on an invoice?
Setting a deadline for invoice payment is essential in any business agreement. It depends on the country, the industry, and the customer regarding how many days are standard payment terms. Without this specification on your invoice, you would not know when to expect the final payment, nor would your customer understand the maximum limit they can wait for their payment.
In which industries is the specification of net 30 on an invoice standard?
For US-based companies, the 30-day payment period is typical. It is most common in the service industry and for small and medium-sized businesses.
There are other occasions where net 30 on an invoice is the traditional solution:
- Governmental activities and orders
- Farm products
- Grain dealers
Why is it necessary to add the term “net” to the length of the payment period?
Today, the invoicing process has largely moved to the online space, eliminating long lead times between seller and buyer. With electronic invoicing solutions like Fiverr Workspace, you can present your client with a ready, correctly issued invoice immediately.
However, that was not always the case: Just a few years ago, it was common for paper invoices to be sent by mail, which added extra time to the whole procedure. It made no sense for the parties to agree on a standard 30-day payment period when the lead time for sending the invoice by mail was up to two weeks. For this reason, the term “net” was introduced, which calculates the period from the date of receipt.
What is the exact practice for net 30 on an invoice?
The parties agree in writing or verbally on the terms of cooperation, including the terms of payment. After the goods or services are delivered, the vendor issues a confirmation of performance.
The certificate of performance must include:
- Amount of consideration and the agreed currency
- Amount of taxes payable
- Total gross amount
- Bank name and the account number
- Payment deadline
After signing the confirmation of performance, the vendor issues an invoice (usually in electronic form) and sends it to the customer. When an invoice is sent electronically, the invoicing software notes the date of issue as the date of receipt, as the invoice is received by the client immediately. At this point, the countdown for the payment period begins, i.e. in our case, the product or service should be paid for after a maximum of 30 days.
What to look for in the net 30 on an invoice
Although, as business owners, we all try to be as flexible as possible for our customers, it is important to know that if the seller is a large company (for example, an electricity or gas service provider), the parties may interpret the content of the net 30 on an invoice differently.
According to the official interpretation, initiating the transfer at the moment the invoice expires is insufficient; the funds must have been received by that date.
To avoid misunderstandings and unnecessary costs, many firms mention on the invoice that the customer should begin paying two to three days before the invoice date. Most invoicing software solutions offer the feature to add notes on the invoice templates – this will help your clients to understand how and when they need to pay.
What can I do as a vendor if my customer does not meet the payment deadline?
According to the Export-Import Bank of the United States, 60% of the issued invoices are not paid in time. To avoid this in the first place, your messages should be branded! According to Fiverr users’ data, those who branded their communications were paid 37% more than those who did not, simply due to customers recognizing them easier.
As a next step, it’s a good idea to clarify the situation: Did the client pay the invoice? (It may have been paid, but for technical reasons, the money has not yet been received.) Has the customer transferred the money to the correct bank account?
If the situation cannot be clarified in this way and you are not promised immediate settlement, you can take the following steps:
- Send automated payment reminders
- Contact the client by email (always prefer an email to a phone call, as it is a record that you can refer to later)
- Send a formal demand for payment
- Restrict access to the product or service as specified in the contract
- You can also take legal action to settle the bill. However, the rules in this regard may vary from country to country, so it is worth asking a lawyer for help
Applying discounts for earlier payment
It is not in the best interest of the opposite party to settle an invoice before the agreed-upon payment date. As a result, the majority of people pay on time or after the invoice has expired.
However, you may promote early payment by offering a 2% discount (2/10 net 30) if the customer pays within the first ten days of an invoice with a 30-day due date (based on the example in the title). Both sides benefit from such a solution since the seller receives an early cash flow and the buyer enjoys a discount on the final sum. Don’t forget that you can only apply a discount on the invoice this way, when you create it in the first place.
How much of a discount should I apply for early payment?
This typically depends on the size of your customers and the value of your account, as a 1% discount on a $100 service is not as effective as deducting the discount from a million dollars. It’s also worth noting that offering a large additional discount to promote early payments isn’t necessary, since this might hurt your capacity to produce profits in the long term. The market standard is a 1-4 percent early payment discount.
Can the parties agree on any payment deadline?
Although the law places limitations in some situations, it typically offers parties a lot of leeway when it comes to negotiating mutually acceptable payment conditions. Alternatives to a net 30 invoice include the following:
- Due on receipt: For freelancers and entrepreneurs, where a stable cash flow might be a daily challenge, or when the business already invested heavily prior to the transaction to fulfill its contractual obligation.
- Net 15 payment: Payment is required within 15 days (a typical option in other countries is 8 days), which is a popular solution in Europe and is generally utilized by small enterprises.
- Net 45 payment terms: It means the customer must pay the invoice within 45 days after receiving it. This one-and-a-half-month time frame is usual if the customer is a larger organization that requires more time to go through the required departments and controls before the invoice is paid.
In addition, 90 and 120-day payment terms are not uncommon, but these are most often used by Fortune 1,000 companies or may be an appropriate solution in cases where very large invoice amounts are involved.
Although you can agree on almost any type of payment terms with your customers, it is vital that you document them fully to avoid any misunderstandings in the future. Using the net 30 on an invoice payment term, you can create a consistent cash flow that provides a positive predictability to your business that will help you retain your customers for the long term.