Last Updated on October 12, 2023
Payment terms are the foundation that allows for seamless transactions between buyers and sellers. Common payment terms include “net D” terms, which specify the amount of time a business or consumer has to complete a payment, in which “D” stands for “days”. One of the most common net D terms that you’ll likely come across is net 45.
Not every business should aim to work on net 45 terms. To help you gain a better understanding of why this is the case, we’ll explore how net 45 payment terms are defined, how they work, and their implications for businesses.
What Does Net 45 Mean on an Invoice?
Net 45 is a payment structure that frequently appears on invoices, but what exactly does it mean?
In simple terms, net 45 means a buyer has 45 days from the invoice issue date to make the full payment. This time period is obviously a bit longer than the standard net 30 payment structure, providing buyers ample time to manage their cash flow and inspect the goods or services they received.
Keep in mind that net 45 typically begins from the date the invoice was issued to the buyer, not necessarily when it was received (unless you’ve worked out a different agreement with your business partner). This is a particularly important note for those that do not utilize electronic invoicing and instead rely on slower delivery methods, such as the mail, as your receival date will be several days after the issue date.
This payment term provides buyers with over a month to organize their financial resources and ensure they have the necessary funds to settle the invoice. It also gives sellers a predictable timeline for when they can expect payment, helping them manage their cash flow effectively.
Net 45 Payment Terms Example
Let’s illustrate how net 45 works with an example. Imagine you’re a supplier providing $1,000 worth of materials to a client on July 1, and the invoice is issued on the same day. With net 45 payment terms, your client has until August 15 to make the payment in full. You can easily calculate the due date for net 45 invoices using altLINE’s invoice due date calculator.
When Do Net 45 Payment Terms Start?
Net 45 payment terms typically start on the date that the invoice is issued. In the previous example, the countdown to the 45-day payment window began on July 1, the invoice issue date. It’s crucial to discuss seemingly small details regarding the specific invoice due date clearly with your clients because these small details can end up being significant if a misunderstanding occurs, leading to late payment.
Pros and Cons of Net 45
There are several pros and cons of using net 45 payment terms as a supplier or seller.
|Provides your customers ample time to pay invoice
|Cash flow strain
|Gives the customer ample time to complete invoice verification
|Risk of non-payment
|Gives you a competitive edge compared to businesses offering shorter payment terms
|Enhanced trust & satisfaction with client
|Not ideal for small businesses with tight budgets
Pros of Net 45 Payment Terms
- Cash Flow Flexibility: As long as you have enough working capital while you await payment, offering extended terms like net 45 will be welcomed by buyers, particularly for small business owners who are having trouble managing their cash flow.
- Quality Assessment: After you send the invoice, you can shift focus to other projects or perhaps your next deal. Meanwhile, buyers have plenty of time to verify and match the goods or services they received with the details on the invoice, reducing the risk of disputes or returns (this process is called invoice verification).
- Stronger Business Relationships: Offering extended payment terms can build trust and goodwill between business partners. It demonstrates an understanding of the buyer’s need for flexibility and can lead to stronger business partnerships.
- Competitive Edge: Depending on your industry, providing net 45 payment terms can be a differentiator from competitors. It positions your company as one that accommodates the financial needs of your clients.
Cons of Net 45 Payment Terms
- Cash Flow Strain for Sellers: Net 45 and similar extended terms can strain cash flow as businesses wait for payment. This delay can hinder the ability to cover operating expenses or other unexpected financial demands.
- Risk of Non-Payment: The more extended the payment terms, the higher the risk of clients delaying or defaulting on payments. Sellers must consider this risk and implement strategies to mitigate it, such as sending automated invoice payment reminders.
- Administrative Burden: Managing and tracking payments for an extended period can increase administrative workload and expenses. Businesses need robust invoicing and accounting systems to handle these challenges effectively.
- Not Ideal for Small Businesses: If you’re a small business owner with minimal working capital who’s always working on a tight budget, offering long payment terms probably isn’t for you as you’ll need to receive payment quicker. Consider net 15, net 7, or other payment methods, such as payment in advance (PIA).
Early Payment Discounts
As a way to encourage prompt payment for net 45 terms, businesses can offer early payment discounts. These discounts provide buyers with a financial incentive to settle their invoices ahead of the net 45 deadline, resulting in you getting paid more quickly. Below are some examples of early payment discounts using net 45 terms.
|Early Payment Discount
|1/10 net 45
|Buyers get a 1% discount if they pay the invoice within 10 days. Otherwise, the full amount is due within 45 days of the invoice issue date.
|2/10 net 45
|Buyers get a 2% discount if they pay the invoice within 10 days. Otherwise, the full amount is due within 45 days of the invoice issue date.
|2/15 net 45
|Buyers get a 2% discount if they pay the invoice within 15 days. Otherwise, the full amount is due within 45 days of the invoice issue date.
|3/10 net 45
|Buyers get a 3% discount if they pay the invoice within 10 days. Otherwise, the full amount is due within 45 days of the invoice issue date.
What Are Other Common Invoice Payment Terms?
A few non-net D options include payment in advance (PIA), end-of-month (EOD) payment – in which payment is due at the end of the month, regardless of the date of issue – and due upon receipt (requiring immediate payment).
To decide the best payment structure for your business, consider the different payment terms that are available, explore what is most commonly used in your industry, and analyze your cash flow to determine how much money you need to have on-hand.
Net 30 vs. Net 45
Net 30 vs. net 45 is a common dilemma. Which terms should your business use?
There’s no perfect answer, as it depends on the specific financial needs and preferences of not just your company but also the other businesses involved in the transaction.
If you’re a small business that’s regularly struggling to maintain positive cash flow, you should go with net 30 (or even shorter payment terms, such as net 15). If you have ample working capital and don’t have cash flow problems, you might feel comfortable with longer terms like net 45.
How Can Long Invoice Payment Terms Impact Your Business’s Cash Flow?
Net 45 and similar extended payment terms offer distinct advantages, but they can also significantly hinder your business’s cash flow. As a business owner, it’s crucial to understand how these terms influence your financial stability and implement strategies to manage them effectively.
When you offer extended payment terms such as net 45, you run the risk of not having the ability to cover expenses or invest in business growth. These payment terms require business owners to walk a delicate line, balancing budgets wisely.
Strategies to Minimize the Impact of Long Payment Terms
To mitigate the potential cash flow strain associated with extended payment terms like net 45, businesses often utilize various strategies:
- Early Payment Discounts: Offering early payment discounts such as “1/10 net 45” can incentivize buyers to settle invoices promptly. The discounts not only accelerate cash flow but also motivate buyers to follow payment terms.
- Invoice Factoring: Invoice factoring is a financing method in which businesses sell their unpaid invoices to a factoring company in exchange for a cash advance. This approach provides an immediate injection of capital, helping bridge the gap between the invoice date and the actual payment date. It offers more predictability and control over cash flow.
- Diversified Payment Terms: Consider offering a mix of payment terms to different clients. Some may prefer net 45, but others might opt for net 30. By diversifying your payment terms, you can strike a balance between accommodating your clients and maintaining a healthy cash flow.
Net 45 FAQs
Let’s address some of the common questions about net 45 payment terms.
Does net 45 include weekends?
Yes, net 45 typically includes weekends and holidays when counting the days, meaning weekends and holidays count toward the 45 days buyers have to submit payment.
What are common payment terms for invoices?
Common payment terms for invoices include net 30, net 60, and net 90. These terms offer different payment windows and are straight forward in structure, making them easy for both buyers and sellers to agree upon.
How do I offer net 45 payment terms?
To offer net 45 payment terms, ensure that the terms are clearly communicated to your client before invoicing begins and on the invoice itself. Specify the invoice date, the due date (45 days from the invoice date), and any applicable early payment discounts.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.