In business finance, net 90 payment terms can be a double-edged sword. Net 90 payment terms give clients 90 days to pay for goods or services in full. 

This extended credit arrangement offers the potential for increased sales and stronger client relationships. But it also demands skillful cash flow management. If you master the balance, net 90 terms have the power to give you a strategic advantage in your market.

Here’s how net 90 payment terms work, the benefits and risks to consider, and a guide to using them in your own small business.

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What Does Net 90 Mean and How Does It Work?

Net 90 payment terms give customers a 90-day window from the invoice date to settle their bill in full. This extended period offers businesses a lot of flexibility in managing their cash flow before the payment due date.

When your business offers net 90 terms, you’re essentially providing a three-month, interest-free loan to their customers. Here’s a typical scenario:

1. Your company provides goods or services to a client.
2. You issue an invoice marked with net 90 terms.
3. The client has 90 days from the invoice date to pay the full amount without incurring late fees.

For instance, if an invoice is dated January 1 with net 90 terms, the payment wouldn’t be due until April 1.

Some net 90 vendors use early payment incentives. One common example is 2/10 net 90, which offers a 2% discount if the customer pays within 10 days. This approach encourages prompt payment while still providing the flexibility of extended terms.

Let’s look at a practical example for a small business. Imagine a boutique graphic design studio completes a branding package worth $5,000 for a local startup. The design studio issues an invoice on March 15 using 2/10 net 90, meaning the startup has two options:

1. Pay $4,900 by March 25th (taking advantage of the 2% discount)
2. Pay the full $5,000 by June 13th (90 days from the invoice date)

This structure gives the startup flexibility to manage cash flow as they launch the business. It also incentivizes early payment, which can help with the design studio’s immediate cash needs for software subscriptions and contractor payments.

While they can be used in any industry, net 90 terms are most common in those with larger transactions, such as manufacturing or wholesale. In these sectors, the high cost of goods often necessitates longer payment periods for clients to arrange funds. To mitigate risk, vendors typically reserve net 90 terms for businesses with solid credit histories.

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Net 90 Pros and Cons

Like any financial arrangement, offering net 90 terms comes with advantages and drawbacks. Here are some of the most impactful:

Pros

• Better cash flow management for your customers. The extended payment period helps better manage their cash flow, making large purchases more manageable over time. This is particularly beneficial for businesses with seasonal income or that often wait on payments from their own customers.
• Stronger business relationships. Offering favorable payment terms builds loyalty and strengthens long-term partnerships with clients. It shows trust and can set you apart from competitors with less forgiving payment policies.
• Potential for increased sales. Without the pressure of immediate payment, buyers may be more inclined to place larger orders. This can lead to higher overall revenue, even if the actual date customers pay the invoice is delayed.

Cons

• Delayed income. Waiting up to three months for payment can strain your cash flow, especially if your business is on the smaller side. This delay can impact your ability to pay your own suppliers or invest in business growth.
• Higher administrative burden. Juggling a large number of net 90 invoices increases the workload for accounts receivable, including tracking payments and sending reminders. This could require extra staff time or investing in complex invoicing software.
• Increased risk. There’s a higher chance of late payments or non-payment, especially if a customer faces financial difficulties during the 90-day period.

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Other Common Net Payment Terms

Net 90 isn’t the only option for payment terms. Here are other common terms you might encounter while exploring your options:

• Net 7. Payment is due within seven days, or a week, of invoicing. This is common for small transactions or rush orders.
• Net 30. This is one of the most common terms, with payment due in 30 days. Comparing net 90 versus net 30, this option still provides some flexibility for the customer but makes maintaining steady cash flow easier for the vendor.
• Net 60. This is a middle ground, offering two months for payment. It’s suitable for bigger orders or businesses with longer cash conversion cycles.
• 2/10 Net 30. This option gives a 2% discount for payment within 10 days. Otherwise, full payment is due in 30 days. This incentivizes quick payment while still offering some flexibility.
• 1/10 Net 60. These terms give a 1% discount for payment within 10 days. Otherwise, the full amount is due in 60 days. This offers a longer payment term with a smaller early payment incentive.

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Should Your Business Use Net 90?

Deciding whether to offer net 90 terms requires careful consideration of your financial situation and industry. These terms can be a good idea if your company has strong cash reserves and can manage a longer payment cycle. They’re well suited to industries where large, high-value transactions are common and buyers need more time to pay.

For smaller businesses or those with tight cash flow, the extended wait for payment could create problems. If keeping up a steady cash flow is critical for your operations, shorter payment terms like net 30 or net 60 might be a better fit.

Consider these factors when deciding whether to offer net 90 terms:

• Your business’s cash flow stability
• The size and frequency of your transactions
• Your industry’s standard practices
• Your ability to cover operational costs during the extended payment period
• Customers’ creditworthiness

For example, a large manufacturing company with large cash reserves might find net 90 terms manageable and use them to attract larger clients. On the other hand, a small service-based business with regular monthly expenses might find that net 90 terms put too much strain on their cash flow.

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4 Tips for Handling Net 90 Payment Terms

If you decide to offer or work with net 90 terms, here are some strategies to help manage them effectively:

1. Diversify your customer base. Avoid relying too heavily on a few big net 90 customers. A diverse customer base with a variety of payment terms can balance out your cash flow.
2. Establish clear policies. Create and communicate clear policies regarding late payments, including any late fees or interest charges. Make sure these policies are clear in your contracts and on your invoices. For instance, you might charge a 1.5% monthly interest on overdue balances. Clear policies help set expectations and can encourage timely payment.
3. Consider invoice factoring. If cash flow gets tight, invoice factoring can provide immediate funds by letting you sell your unpaid invoices to a third party. While this comes at a cost, it can be a useful tool for managing cash flow with extended payment terms. For example, if you have a $100,000 invoice on net 90 terms, you might be able to get $95,000 immediately through factoring. This helps you cover immediate expenses.
4. Use invoicing software. Using invoicing software to streamline your billing process is often a worthwhile investment. It can help you stay on top of outstanding invoices and reduce the administrative burden of managing net 90 terms.

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Invoice Simple’s Payment Processing Software Makes It Easier

Take the headache out of offering net 90 terms with Invoice Simple’s flexible digital invoicing solution.

Get Paid Faster With Online Invoice Payment ProcessingGive your customers flexible online payment options. With Invoice Simple, you can send digital invoices via email, SMS, or manual link-sharing. You can also make it easy for your clients to pay you instantly from a paper invoice by turning on the Invoice Simple Payments QR Code. Your clients can scan the QR Code with their phones and pay online. It doesn’t get easier than this.