Net 30, Net 60, Net 90 on an invoice, refers to the grace period that a customer can pay what they owe before a bill is overdue. A Net 30, 60, or 90 invoices is issued to customers who receive goods or services on credit.
Most businesses will specify a discount if the customer pays the debt within a shorter period, and an interest rate, if the customer makes late payments. Read on to learn the benefits and risks of net terms.
Net Terms Can Expand Your Customer Base
As many as 66% of Small and Medium Enterprises (SMEs), say they experience cash flow problems. Another 33% of SMEs say they have over $20,000 in outstanding receivables.
If SMEs form part of your core market, then you may lose up to 66% business opportunities, if you do not offer trade credit. However, both the lender and borrower, have to agree on the repayment terms of the trade credit.
How Business Work Out the Net Terms
The first step is for the supplier to come up with a reasonable repayment period that the customer can agree to. For most businesses, that period can be 30 days, 60 days, even 90 days. If the customer agrees to it, then they can receive a Net-30, Net-60 or Net90 trade credit.
Moreover, the supplier may offer the customer a discount such as 3%, if the customer pays what they owe, after 5 to 10 working days. If the customer pays after the due date, suppliers can charge interest of say 7%, on what they owe.
The interest helps to discourage late payments, and boosts the supplier’s cash flow, as more customers repay their credit.
Benefits and Risks of Net Terms
By offering net terms, businesses can drive more sales and increase profitability. Net terms can also make customers more loyal and bring new ones. Overall, Net terms provide a competitive edge over competitors who do not offer net terms to SMEs.
The downside of offering net terms includes the extra work of carrying out due diligence and tracking debts, time wasted on debt follow-ups, and cash flow problems if the customer defaults. Profit margins can also drop if you opt to use a debt collection agency.
Managing Net Term Customers
Knowing your customer is key to establishing net terms that will benefit both your business and the customer. If a customer is having severe cash flow problems than their competition, then it is best to offer them limited trade credit.
You can then continuously increase it as their cash flow improves. You can also base it on resources such as Purchase Orders in their possession. Another option is to offer them better terms such as net-90 and increase the cost of the product or service.
Automate Your Net Term Decisions
Do you have a set of rules you use to determine the net terms to offer clients? Do you know you can automate the process to help you reduce bad debts and grow your business? Contact us now to get started.