Demystifying Net 30 Invoice Terms | Behalf

By December 30, 2016Customers
demystifying net 30 invoice terms

Net 30 invoice terms are a hot button topic in the business world. Many businesses offer their customers net 30 invoice terms, allowing them to pay for invoices up to 30 days after they are billed. More often than not, they run into complications with customers failing to pay on time, if at all. Failure to comply with net 30 invoice terms is so commonly experienced by businesses large and small it has been given a name: “the net 30 trap.”

In order to avoid the trap, you must understand the phenomenon. The net 30 invoice trap is often described as a power play between customer and supplier. The customer uses their purchasing power to leverage their way into more favorable/lenient payment terms. It tends to happen overtime, slowly lowering the supplier’s payment expectations and causing them to come up short deadline after deadline.

There is a lot of speculation over what causes the net 30 effect. Many fail to realize that offering net 30 invoice terms is simply offering credit. Giving net 30 invoice terms to your customers means you are extending them credit for 30 days. These terms give the customer the upper hand over the transaction because they are open to interpretation. The question is: within 30 days of what? The more ambiguous the terms, the easier it becomes for customers to twist them to their benefit.

There are ways to avoid falling into this trap, but if you are a corporation with an accounts receivable department in the throes of the net 30 trap, you may still feel net 30 invoice terms are a necessary evil you must consider for the sake of your customers. There are other ways to accept payment from customers that won’t hang your accounts receivable department out to dry. This article will touch on some of the tedious steps you must take to protect your business while using net 30 invoice terms and finally reveal a simpler alternative:

Incentivize

  • If you want customers to pay on time through net 30 invoice terms, you will have to give them an incentive. One tried and true method to motivate customers to pay is charge interest on late payments. The interest rate must be high enough that it gives your customer incentive to pay, roughly the cost of consumer credit. Another method is to provide a discount to those who pay early. Incentivizing is extra work that your company could avoid by offering customers another payment option that is just as flexible but less demanding.

Clarify Net 30 Invoice Terms

  • If you offer net 30 invoice terms, you MUST clearly communicate when the “net 30” begins. You want to make sure your customers are on the same page as you. Do not allow room for error. Net 30 invoice terms make your company vulnerable. Explicitly state your terms and reinforce them aggressively; you must protect the backbone of your business. Offering a third party line of credit to customers gives you a line of defense. Put a third party at the front lines, not your accounts receivable department.

Turn Unruly Customers Away

  • If you are a large business you most likely have a protocol for handling non-paying customers. Stick to protocol and turn down any customers that refuse to pay on your terms. The transaction goes both ways. Just like your customer can refuse your services, you can refuse their future business if they do not respect your terms. It is important that you protect and defend your business.

Limit Net 30 Invoice Terms to Repeat Customers

  • Do not allow new customers to use net 30 invoice terms. If you must use it, use net 30 with customers you have a strong relationship with. At the end of the day, it is a credit. They should display some level of trustworthiness or demonstrate their ability to follow through with payments, if you are going to extend them the net 30 invoice terms. This will require your company to tailor payment options to customers based on their qualifications.

Cushion Your Capital

  • Even if you took all the right steps in extending the net 30 invoice terms, you may still run into a customer who is unwilling to pay or stalling their payments. You must protect your business from risk. Short term financing can cushion your working capital, making you less dependent on customer payments. There are options like factoring, where you sell your invoices to a factoring company but they can be costly to your business. Loans can be time consuming and have high interest rates. A line of credit gives you flexibility, control and time to nurture your relationship with customers, while still keeping up with the cost of running your company.

Ditching net 30 invoice terms will not scare off your customers if you provide a strong alternative. Accepting payments through a third party, like Behalf, who would settle your receivables immediately and then collect payment from the customer, would leave you less vulnerable. It would also take the pressure off of your accounts receivable department and remove this sensitive friction point between you and your customers. Allowing your customers to pay you with a Behalf line of credit also increases your customers’ purchasing power so they can buy more of your company’s products and services.

Learn more about how Behalf is transforming the way businesses buy and sell here.