Proper invoicing encourages clients to pay promptly, and gives you recourse when they don’t. However, research presented by PYMNTS shows that 41 percent of small businesses say that collecting on invoices is still their greatest challenge, and more than one-third report that it takes clients in excess of one month to pay. Another survey by Atradius shows almost half of all B2B invoices are paid late. It’s clear there’s a gap between what businesses want and need and what’s actually happening.
On this page, we’ll go over the definition of Net 30 and other common invoice terms, so you can apply the right strategies to your invoicing processes and eliminate unnecessary waits.
- Net 30 or Net D
You may see Net 30 written as “Net 30 days.” In these cases, “net” refers to the total amount due after all discounts, and the number (represented by Net-D) references the total number of days after the services are rendered or goods are sent for which the recipient is required to submit payment. In other words, if you perform a service for a client on July 1 and the invoice says “Net 30,” the client is expected to pay in full on or by July 30.
Businesses may elect to establish other timeframes, though 30 days is the most common. For this reason, you may sometimes see the term “Net 60” indicating a 60-day payment window or “Net 90” indicating a 90-day payment window. However, it’s important to note that this is the equivalent of extending credit to the customer.
While it can generate goodwill and make it easier for customers to do business with you, sluggish cash flow can cause serious issues for your company. For this reason, many contractors and service-oriented companies will use Net 10 or Net 15 instead. These can be acceptable terms, but it’s important to make the timeframe clear to customers in advance as they may be more accustomed to longer windows.
- 3% 10 Net 30 or 3/10 Net 30
Businesses can encourage faster payments by sweetening the pot. A common reward for faster payments is to offer a discount when the invoice is paid in full by a specific date before the final due date. This is where terms like “3% 10 Net 30” or “3/10 Net 30” come in. In both cases, the customer is expected to pay his or her invoice in a 30-day window. However, the “3” represents a discount of 3-percent and the “10” represents the window in which the customer must pay to receive the discount. With these examples, the client must pay within 30 days, but if he or she pays within 10 days, he’ll get 3 percent off the bill.
Like the “net” terms, businesses can customize their discount offerings. For example, if an invoice says “2% 15 Net 30,” the company is offering a 2-percent discount when the invoice is paid within 15 days, but the full amount is due if the customer waits until days 16-30 to pay.
- Payment on Receipt
You do not need to extend credit to your clients at all. As an alternate option, you may elect to note “payment on receipt” on invoices. This means payment is expected as soon as the customer receives your invoice or goods/ services are delivered.
- Interest Invoice
Because you’re extending credit to your clients by allowing them to pay for goods or services after they’re delivered, you’re entitled to charge interest for delinquent payments. However, you must make it clear that you intend to do so beforehand.
The amount of interest you charge is entirely up to you. There are some industry-specific norms, but it’s common to see interest charges of anywhere from 1 to 15-percent or more. You’ll also have the option of compounding interest on a daily or monthly basis. If you’re using accounting software, it will handle the math for you and make the process of adding interest simpler. However, you will want to ensure customers are receiving “interest invoices” or updated invoices showing their new fees, on a regular basis. If your late fees are added monthly, sending a monthly interest invoice may be adequate, though, for the sake of customer service, it may be better to send a quick note as soon as a payment is missed, so clients have the ability to catch up before an additional fee is assessed.
It’s also worth noting that having a late-payment penalty does not necessarily mean you have to assess one. You’re free to waive your fees at any point in the interest of customer service.
- Recurring Invoice
When your customers have recurring demands, you can set your accounting software to generate invoices at regular intervals. Doing so makes it easier to predict cash flow.
- Payment in Advance (PIA)
It’s common in some industries for clients to pay some of their costs in advance. This is more common when estimates are used. For example, if a contractor says his total fees will be $1,000, he may request 10 or 15 percent of the estimate ($100-150) in advance to cover supplies. Depending on your industry, you may also be able to offer customers a discount for paying an invoice in full in advance.
- Terms of Sale
It has been noted that it’s important to convey your terms to your customers. You’ll do this through your terms of sale (TOS), which should appear on estimates, invoices, your website, and other customer-facing communications. Again, accounting software can provide you with stock TOS, but it’s advantageous to customize yours and run it past an attorney before applying them. Your TOS should cover:
- The scope of your work
- Your obligations and timelines
- Any promises you’re making
- When and how clients are expected to pay
- Who is responsible for duty fees and taxes
- What penalties will occur if you or the client does not fulfill obligations
- How dispute resolution will be handled, and
- Invoice Financing and Factoring.
While strong invoicing practices can help reduce the gap between performing work or delivering goods and getting paid, it can be complicated and time-consuming. Unfortunately, it may also not be enough to solve cash flow issues. Invoice financing and factoring companies help B2B companies by providing them with immediate payment for their open invoices. In the case of factoring, the company outright purchases the invoices and handles the full invoicing process, freeing the business to focus on its core tasks without the burden of billing.