Managing payments is like conducting an orchestra. Everyone needs to play their part at just the right time. If not, they risk getting out of sync and creating a cacophony of late payments and cash flow.

That’s why there are net terms. Net terms are payment agreements that help businesses work in harmony. They give customers anywhere from a week to three months or more to pay an invoice, with clear due dates everyone agrees on.

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What Are Net Terms?

Strategic payment timing can make or break a business relationship—not to mention your cash flow management. That’s why smart businesses use net terms. Net terms tell customers how long they have to pay the invoice. You let them buy something today but pay for it later, without any extra charges or interest.

Let’s break down how net terms work. You and your customer agree on when the clock starts ticking. It usually starts when you send the invoice, but it could also be when they get the product or receive the bill.

For example, let’s say you’re a small printer and your favorite client just ordered 1,000 business cards. If you offer net 15 payment terms, your customer has 15 days from the date you send the invoice to pay.

Many businesses use net terms, especially in business-to-business (B2B) sales. Small businesses know that offering net terms can open doors to bigger clients who might pass them by otherwise. These larger companies often have carefully planned payment cycles, so they look for vendors willing to work with their schedules.

Net terms resemble a loan, which is why they’re sometimes referred to as trade credit. The difference is that there’s no interest during the payment period. This is helpful for customers who need to get paid by their own clients before they have the runway to pay the invoice.

Many businesses offer early payment discounts for invoice payments before the due date. A common example is “2/10 net 30,” which means customers get 2% off if they pay the invoice within 10 days. Otherwise, the full amount is due in 30 days.

While this might trim your profits a little bit, it’s a good way to speed up your cash flow. Many small businesses find that a small discount is worth it to get paid faster.

Using net terms effectively often comes down to clear communication. Your invoice should spell out when to pay, how to pay, and what happens if payment is late. When everyone’s on the same page, your cash flow and your clients stay happy and healthy.

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Common Net Terms

Payment terms come in all shapes and sizes. Let’s look at how different businesses use them and when each type makes sense:

• Net Zero. Let’s start with the basics: What does net zero mean? While most businesses simply call it “due on receipt,” net zero is another way to say payment is due immediately. This is common for retail stores, restaurants, and many other day-to-day businesses that deal directly with consumers and offer on-the-spot products or services.
• Net 7 Payment Terms. A week-long invoice payment window works well for services with a quick turnaround. Service businesses like landscaping or cleaning might use these terms when they need steady cash flow but still want to offer some flexibility. It’s perfect for small businesses that need quick payment to cover regular expenses like payroll or supplies.
• Net 10 Payment Terms. This short-term option gives customers 10 days to pay. It’s a good middle ground between getting paid right away and offering net 15 terms. Think of it as a short-term credit option that doesn’t stretch your cash flow too thin.
• Net 15 Payment Terms. Two weeks is a nice middle ground between short-term payment windows and longer ones, like net 30. If you have a client on longer payment terms who consistently pays late, you might consider dropping them down to net 15 to nudge them toward better payment habits.
• Net 30 Payment Terms. These are the most popular payment terms across industries. They give customers a full month to pay and may come with early payment discounts. Many small and medium-sized businesses prefer net 30 terms because they balance everyone’s needs. Suppliers get paid in a reasonable time, while buyers get enough breathing room to manage their cash flow.
• Net 45 Payment Terms. Less common than net 30 or net 60, these terms give customers 45 days to pay. They’re mostly used in certain industries where longer payment cycles are needed. While they offer more flexibility, they also require extra careful cash flow planning.
• Net 60 Payment Terms. These net terms come into play when deals are bigger, and companies need more time to process payments through their systems. With the invoice due date so far in the future, these terms really put your cash flow management to the test.

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Pros and Cons of Net Terms for Small Businesses

Like any business decision, offering net terms comes with both benefits and challenges. Let’s take a look at both sides of the coin:

Pros

Offering payment terms can open doors for your small business. You can attract more customers, possibly larger businesses who won’t give you a second look if you only work with due on receipt terms. Plus, you can get bigger orders since customers don’t have to pay the full invoice amount upfront.

Having set payment terms also makes budgeting easier. You learn when to expect each invoice payment, which helps you plan ahead for your own expenses.

Finally, net terms often lead to stronger business relationships. When customers know they can trust you with flexible payment options, they’re more likely to stick around and refer others. This can really help your business grow.

Cons

The trickiest part of net terms? Any small business owner will tell you it’s managing cash flow. When you’re waiting to get paid, your money is tied up in unpaid invoices. This can make it tough to pay your own bills or take advantage of supplier discounts. 

But as long as you’re willing to plan strategically, experiment, and find the best terms to balance your cash flow needs and flexibility for your clients, you can make it work.

There’s also more administrative overhead involved with running net terms, meaning you’ll use up more time and resources. You need to track multiple due dates, follow up on invoice payments, and maybe even hire extra help for your accounting department. 

Many businesses find they need better systems to manage all the moving parts, from checking customer credit to handling overdue payments.

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Should Your Business Use Net Terms?

Before diving headfirst into net terms, take a good look at your finances. Can your cash flow handle waiting longer to get paid? If you’re struggling to pay bills now, offering net terms might not be the smartest move.

Look at your day-to-day operations too. Do you have software or someone who can track invoice payments and follow up when they’re late? You need good systems to manage payment due dates and keep tabs on who owes what.

Next, check out what’s typical in your industry. If competitors offer net terms and your customers expect them, you might need them to stay competitive. But if most businesses in your field get paid right away, net terms might not be necessary—or they could help you stand out from the pack.

Finally, figure out how to handle risk. Have a clear plan for what happens when payments are late. Will you charge fees? Stop taking orders? Net terms work best when you spell out the rules from the beginning.

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3 Tips for Choosing the Best Net Payment Terms for Your Small Business

Keep these tips in mind to help your net terms program hit all the right notes:

1. Vet Your Clients. Before offering net terms, do your homework. Check business credit reports, ask for trade references, and look at how long clients have been in business. Start with a small order to test the waters before extending larger amounts of trade credit.
2. Know Your Limits. Set clear rules about who gets net terms and who doesn’t. Decide on your maximum term length and stick to it. If a customer has a history of late payments, it’s okay to give shorter terms or ask for payment upfront.
3. Leverage Technology. The right tools make managing payment terms much easier. Good invoicing software automatically tracks due dates, sends payment reminders, and flags late payments.

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Invoice Simple Makes Net Terms a Breeze

You handle the “when.” Invoice Simple handles the “how.”

With Invoice Simple, you can give your customers flexible online payment options. Send digital invoices via email, SMS, or by manually sharing a link. 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.