Net payment terms: A guide for businesses

Key takeaways

• Net payment terms provide customers with a specified period to make a payment after receiving an invoice. The most commonly used terms are Net 30, Net 60, and Net 90.

• Offering net payment terms can increase sales, improve customer loyalty, and help you maintain a healthy cash flow.

• Airwallex helps you manage net payment terms efficiently, giving you real-time visibility over incoming and outgoing payments, flexible payment options for your customers, and automated workflows to maintain a healthy cash flow.

Staying on top of your finances can be challenging when you have multiple invoices entering and exiting your system at various times, whether for customer payments or supplier payouts. These different timelines can make it difficult to get a clear picture of your cash flow, especially when payment schedules vary. When managing invoices, you may encounter net payment terms, which specify the timeframe during which customers must settle their payments after an invoice is issued.

Understanding how net payment terms work and their impact on your business can help you plan and manage your finances more effectively. That’ll keep your cash flow steady and customer relationships strong. For example, offering net terms to your customers can enhance trust and encourage recurring orders, providing a predictable income stream.

In this guide, we’ll break down what net payment terms are, explore their pros and cons, and help you decide if net payment terms are right for your business.

What are net payment terms?

Net payment terms define when a payment is due after an invoice is issued. It's a set period stated on an invoice, usually ranging from 15 to 90 days. It provides a clear deadline for when the buyer should make a payment and when the seller should receive it. For example, an invoice that reads “Net 30” means that full payment is due 30 days after the invoice date.

Net payment terms help buyers and sellers manage their cash flows more effectively and are common in business-to-business (B2B) payments. This arrangement can benefit small- to medium-sized businesses that require more flexibility. When you’re paying vendors and suppliers, net payment terms give you more flexibility for timing your payment. When receiving a payment from a vendor or supplier, offering net payment terms can provide a more predictable settlement schedule, helping you manage your cash flow more effectively.

Commonly used net payment terms

Here are some commonly used net payment terms:

Net 15

• What it means: payment is due 15 days after the invoice date.

• Who should use it: businesses managing smaller, time-sensitive transactions, such as retail or small-scale service providers.

• What it does: secures the cash flow needed to meet near-term operational demands.

Net 30

• What it means: payment is due 30 days after the invoice date.

• Who should use it: small- and medium-sized businesses.

• What it does: strikes a balance between giving customers the flexibility to manage their finances and ensuring that the business receives payments on time. This term helps businesses maintain a steady cash flow while building trust with their customers.

Net 60 

• What it means: payment is due 60 days after the invoice date.

• Who should use it: businesses managing complex transactions.

• What it does: attracts more customers with a generous payment window, nurtures long-term relationships, and secures more substantial contracts.

Net 90 

• What it means: payment is due 90 days after the invoice date.

• Who should use it: businesses in capital-intensive industries, with long project cycles or staggered revenue streams.

• What it does: maintains a healthy cash flow when businesses align their payment cycles with project milestones.

Net payment terms vs credit cards

Besides net payment terms, credit cards are another type of short-term financing option. While both net payment terms and credit cards allow deferred payments, they work and affect cash flow differently. In short, net payment terms enable customers to settle a payment on a later date, typically at low or no fees and interest. Credit cards would allow customers to settle payments immediately, although a credit card processing fee is often associated with this convenience. Additionally, late credit card repayments incur an interest charge.

*Payment processing fees typically include interchange fees, assessment fees, and other platform or acquirer costs. These fees may be higher for non-local (foreign-issued) cards.

Here's how net payment terms compare against credit card payments:

Net payment terms offer longer grace periods compared to credit cards

When you offer net payment terms, you get to extend credit on your terms, whether it’s 30, 60, or 90 days. Net terms give you the flexibility to align payment schedules with your customers’ needs while still forecasting your cash inflows predictably. With credit card payments, you have less control to structure your inflows, since it’s the card issuer that extends the credit line to your customers.

Net payment terms don’t come with payment processing costs

Net payment terms generally don’t involve transaction fees, unless you set them. Customers only incur interest or late fees set by you if they miss payment deadlines. Accepting card payments, in contrast, incurs a 1–3% foreign transaction fee. This fee can reduce your profit margin and affect your pricing competitiveness.

Net payment terms can strengthen customer relationships

When you extend a line of credit directly to your customers, you’re showing an act of goodwill, helping you build stronger relationships. Offering net terms is essentially providing short-term financing that helps your customers manage their cash flow, positioning you as a reliable partner. This differs from credit card payments, where the bank extends the line of credit and earns the customers’ trust instead.

Pros and cons of offering net payment terms

Offering net payment terms can be a strategic move, but it’s important to weigh the pros and cons before you decide.

Pros of net payment terms

• Encourage more sales: When customers don't have to pay upfront, they may be more willing to make larger orders or more frequent purchases. You can further drive conversions by making it easier for them to pay you, such as by adding payment links in emails and invoices.

• Improve customer relationships: Giving customers the flexibility to pay can build trust and strengthen your relationship with them. 

• Gain a competitive advantage: If your competitors offer net payment terms, consider doing the same to stay competitive. You can further differentiate yourself by offering more favorable terms or better customer service.

Cons of net payment terms

• Longer wait for payment: While net payment terms can help you predict cash flow more accurately, it could strain your cash flow in the short term if you have insufficient cash reserves.

• Risk of late payments: Late payments can affect your ability to meet financial obligations, such as paying suppliers or covering operational costs. To help your customers pay you on time, it's essential to offer fast and intuitive payment options, such as via credit cards, digital wallets, or bank transfers.

• Complex accounting and reconciliation: Managing staggered payment terms can be complex and time-consuming. The right payment provider can help by automating invoice approvals and payments, giving you a clearer view of your outgoing cash flow, and reducing manual reconciliation.

Overall, offering net payment terms can be beneficial for providing your customers with flexibility in their payment options. But your systems should be able to handle staggered payments and collect payments quickly when they're due.

Should your business offer net payment terms?

Deciding whether to offer net payment terms depends on your industry, customer base, risk tolerance, and cash position. Consider these questions before making a decision:

• Are net payment terms common in your industry? In sectors like manufacturing, wholesale, or B2B services, net payment terms are often the norm. Offering net terms aligns with what your prospects already expect, making it easier to gain trust and convert new customers.

• Can you assess your customers’ creditworthiness? Conduct credit checks to identify customers with a history of timely payments, or start with shorter terms before extending to Net 60 or 90.

• Do you have strategies in place to ensure timely payments? Providing clear payment information helps minimize confusion and delays. Offering local currencies and familiar payment methods makes it easier for customers to pay you on time.

• How would you mitigate late payments? Consider incentivizing early payments with small discounts, or charging late fees or interest to discourage late payments.

• Do you have tools in place to track payment status and follow up? Modern fintechs, such as Airwallex, offer solutions that streamline both incoming and outgoing payments, providing real-time visibility into payment statuses and deadlines.

Managing net payment terms as a global business

Net terms are often built around domestic payment infrastructure: local bank transfers, local currencies, and familiar banking systems. However, when managing international customers or suppliers, the process becomes more complex. Payments may get delayed when funds are sent via unfamiliar banking rails or when there are incompatible payment methods. Currency mismatches necessitate foreign exchange conversions, which can result in slower and more costly transactions.

Whether you’re expecting funds from a customer or need to pay a supplier across borders, these issues can disrupt even the best-managed net terms. You might be offering Net 30 terms to your customers while simultaneously working with a supplier who expects payment in Net 15 days. Managing overlapping timelines can strain your cash flow if not managed well, especially when operating across different countries and currencies.

Net terms are only effective if your customer can‌ realistically pay you on time. That’s why businesses are rethinking how they manage B2B payments: pairing flexible terms with global payment infrastructure.

Make and receive payments on time, every time

Don’t let mismatched payment schedules slow down your growth. Whether it’s Net 30 or Net 60 terms, Airwallex makes it easy for you to make and receive payments on time, every time, all on one platform.

Reduce the risk of late payments by allowing customers to pay you easily and quickly, regardless of the payment terms you offer. With Airwallex, your customers can pay you using 160+ local payment methods and major card schemes, in 130+ currencies. You can also embed Payment Links on your invoices.

To ensure timely payments and maintain strong supplier relationships, automate supplier payouts to over 200 countries with Bill Pay, setting schedules that align with your suppliers’ net terms. With 120+ countries using local payment rails, 95% of our transfers settle within a day. You’ll also never lose sight of your payments with our Expense Management solution, which lets you track invoices and get alerts when payments are due.

Frequently asked questions

What are the benefits of offering net payment terms?

Net payment terms let you offer flexible payment options, which can lead to more sales, stronger customer relationships, and healthier cash flow. Customers are more likely to make larger purchases when they have the flexibility to pay later. With a clearer picture of when you'll get paid, you can forecast and manage your cash flow better.

What are the risks of offering net payment terms?

Offering net payment terms can increase the risk of late or missed payments, especially when you’re managing staggered payment schedules. It can involve complex administrative tasks, such as tracking invoices, chasing overdue payments, and maintaining accurate financial records. The right tools and processes, such as automated reminders and payment tracking, can help you reduce these risks.

How can I manage net payment terms effectively?

Make it easy for customers to pay you by sharing payment links and offering preferred payment methods. Set clear payment terms to ensure your customers understand the due dates and any penalties for late payments. To ensure timely supplier payments, streamline the payment process with scheduled payments and automated invoicing, so that you'll never miss a deadline.

Sources

1. https://www.fool.com/money/research/average-credit-card-processing-fees-costs-america/

2. https://www.investopedia.com/average-credit-card-interest-rate-5076674