What Are Net Terms?
July 19, 2021
For vendors, suppliers, and freelancers, getting paid on time can be a bit of a struggle. Companies can take months or even years to pay off an invoice. Billing cycles can often continue well beyond the terms of a scope of work.
In some instances taking a long time to pay is neglectful business, sure — but seen through another lens, a company delaying payment is just them taking as much time as they “are allowed.” Paying later is helpful for companies optimizing their cash flow.
Ultimately there’s a discrepancy — one party wants to be paid quicker, and the other wants to take some time. That’s where net terms come in. Net terms offer a simple arrangement between a payer and a vendor that keeps everyone on the same schedule. Each party is incentivized to stay on track.
How Do Net Terms Function?
When a vendor invoices a business with net terms, they’re providing a finite period of time for their invoice to be resolved — usually within a 30, 60, or 90-day payback time period. If a buyer doesn’t comply within this period, a supplier can insist that they pay them back with interest accrued.
Obviously the buyer can choose to pay the invoice earlier than the final due date, but more often than not, buyers will opt for fulfilling an invoice at the latest possible date.
Why? When a buyer is able to hold off paying back a supplier for as long as they can without accruing interest, it allows them to turn the goods they’ve received from the supplier back into capital.
But that doesn’t mean buyers avoid net terms. In fact, if a supplier doesn’t present net terms on their invoices, a buyer will often have its own form of net terms set up with its accounts payable — typically anywhere from a 30-45-day pay period.
Discounts Offered With Net Terms
Payers need to be incentivized to pay back their vendors sooner rather than later. That’s why net terms often include favorable discounts for payers who pay ahead of their 30, 60, or 90-day deadline. A general standard for this discount is about 1%-2% off the entire bill, but it can fluctuate depending on the agreed-to terms.
Take, for example, a company who has net-30 established with their vendor. The parties can agree to discounting the bill if the payer pays earlier than the 30 days. Oftentimes discounts on net terms are written according to the rate of the discount and the days in which it would have to be paid instead.
For example, net terms written as 2/5, net 30 means a company would receive 2% discount if it paid in 5 days instead of paying in 30 days.
Interest Accrued With Net Terms
While some net terms compel the payer to pay early through discounts, others compel promptness through interest. Payers and vendors agree to net terms that include accruing interest for invoices not paid on time.
Interest agreements at complexity to net terms and make it so cash flow management is critical on the company’s end. No company wants to end up paying a vendor more than they agreed upon simply because they missed a payment deadline. This is another way in which net terms can compel a company to pay as soon as possible.
The Benefits of Net Terms
Net terms serve as a guard rail, mediator, and balancer for both the supplier and the buyer. The suppliers get to feel like they have protection when it comes to getting paid, and the buyers are able to stay on target with their cash flow processing. Less stressing, less guessing, and more processing!
Because net terms set the stage for a mutual agreement between both parties, it not only establishes a greater sense of trust between the supplier and the buyer, but it also creates customer loyalty. Net terms consistently rewards and benefits companies for making sure their cash flow is being used as efficiently as possible.
In fact, if a supplier doesn’t present them on their invoices, a buyer will usually have their own form of net terms set up with their accounts payable — typically anywhere from a 30-45-day pay period.
How Settle Can Help Both Sides
Settle is an effective go-between for payers and vendors that helps to ensure they hit their net terms. It’s a modern, reliable cash flow management system that ensures every invoice is paid by its deadline.
One of the most significant ways Settle does this is by offering extended payment cycles for companies. This means Settle will pay vendors on the company’s behalf so the company can focus on growth and expansion. Most importantly, these terms are hit on time so companies and vendors can benefit from the perks of established net terms.
The future of cash flow management is here. Learn more at settle.co.
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