Last Updated on November 22, 2023
In the world of business transactions, payment terms are the linchpins upon which the entire system is constructed. They play a crucial role in managing cash flow and maintaining healthy financial relationships, and for any business owner, understanding payment terms is vital prior to creating an invoice. A relatively common payment term is net 60.
If you have experience handling accounts payable or accounts receivable processes, you probably already know how to define net 60. But if not, a clear understanding of financial vocabulary like this ensures that you have a solid grasp on your business operations, cash flow, and legal rights.
Continue reading as we break down what net 60 payment terms is and how it works, before we showcase the pros and cons of long payment terms and discuss other common invoice payment terms.
What Are Net 60 Payment Terms and How Does It Work?
As the name suggests, net 60 payment terms tell the buyer that they have 60 days to make payment from the date the invoice was issued. If you don’t already know, invoice payment terms are the agreed-upon time frames in which buyers are expected to pay an invoice after receiving goods or services. Usually, these terms – also known as trade credit terms – are set before an invoice is delivered. On rare occasions, terms are agreed upon after the transaction is complete.
Net 60 payment terms are one of the longer common ‘net D’ terms (D = days the buyer has to submit payment), meaning it’s important not to work on these terms unless you’re confident you can go up to 60 days without receiving payment for your product.
One thing to note: communicate with your business partner regarding when net 60 starts. Usually, the clock starts on the date the invoice is sent, as described above. But what if an invoice is sent by mail rather than electronically? In that case, net 60 could begin when the invoice is received by the buyer. Details like this might seem small, but it can help avoid misunderstandings between business partners which could potentially lead to an invoice being paid late and a tense working relationship.
Net 60 Payment Terms Examples
Consider a scenario where a business provides $1000 worth of goods to a client on July 1, and the invoice is issued on the same day. With Net 60 terms, the client has until August 30 to make the payment.
Beyond this example of standard net 60 payment terms lies trade credit terms that are a bit more complex. Let’s take a look.
1/10 Net 60
1/10 net 60 is an example of an early payment discount. This is a variation of net 60 terms that offers a small discount to incentivize early payment.
In this scenario, the buyer can take advantage of a 1% discount if they pay the invoice within 10 days of the 60-day period. If not, the full payment is due within 60 days. Note that an early payment discount like this isn’t exclusive to net 60, for example this kind of option exists for Net 30 as well (1/10 net 30).
2/10 Net 60
2/10 net 60 follows a similar principle as 1/10 net 60, except it offers a slightly higher discount of 2% for early payment within 10 days. If a buyer chooses not to take advantage of the discount, the full payment remains due within 60 days. Similar to 1/10, this sort of option exists for net 30 (2/10 net 30).
Pros and Cons of Long Payment Terms
Long payment terms like net 60 come with their own set of advantages and disadvantages. Let’s break it down.
|Cash flow flexibility for buyers||Cash flow strain for sellers|
|Quality assessment||Risk of non-payment|
|Competitive edge||Administrative burden|
|Enhanced trust & satisfaction with client||Not ideal for small businesses with tight budgets|
Pros of Long Payment Terms
There are several benefits of long payment terms, offering the following advantages for business owners:
- Cash Flow Flexibility: Net 60 payment terms grant buyers a significant window to organize their finances and allocate resources strategically. This approach to B2B transactions allows buyers some breathing room to manage their cash flow and come up with the cash to pay the invoice.
- Quality Assessment: Buyers have ample time to complete invoice verification, reducing the risk of disputes or returns.
- Competitive Edge: Providing extended terms can be a decided factor for clients who choose your business over your competition.
- Enhanced Trust & Client Satisfaction: Offering longer terms can foster trust and goodwill between business partners, potentially leading to more significant and enduring collaborations.
Cons of Long Payment Terms
Of course, long payment terms like net 60 are not without their drawbacks – which are important considerations for your overall business strategy.
- Cash Flow Strain: Longer payment terms can lead to delays in revenue collection – ultimately affecting the seller’s cash flow and working capital.
- Risk of Non-Payment: The more extended the payment terms, the higher the risk of clients delaying or, even worse, defaulting on payments, leading to late fees.
- Administrative Burden: Managing and tracking payments for an extended period of time can increase admin workload and expenses.
- Not Ideal for Small Businesses: If you’re a small business owner with minimal working capital, always working on a tight budget, long payment terms probably aren’t for you as you’ll need to receive payment quicker. Consider net 15, net 15, or net 7.
Other Common Invoice Payment Terms
Aside from net 60, there are several other common invoice payment terms for businesses.
These terms vary in their duration and can significantly impact cash flow and financial planning for both buyers and sellers. Choosing the right payment term depends on the nature of the transaction and the financial needs of the parties involved.
- Net 7: This term indicates that the buyer has 7 days from the invoice date to make the payment in full.
- Net 15: Net 15 provides a 15-day window for payment from the invoice date.
- Net 30: One of the most common payment terms is net 30, which allows a month for buyers to settle invoices.
- Net 90: An even longer payment term than net 60, net 90 allows clients a full three months to complete their payment.
Payment in Advance (PIA)
Some businesses may require payment upfront before delivering goods or services. This approach minimizes risk for the seller – but doesn’t offer much flexibility for the buyer. Depending on the value of the service and the business relationship, this is a reasonable approach.
End of Month (EOM)
EOM terms require payment at the end of the calendar month in which the invoice is issued. This provides a better sense of month-to-month cash flow management.
Due Upon Receipt (Immediate Payment)
This term demands payment as soon as the client receives the invoice. This approach is often used for urgent or one-time transactions.
How Invoice Factoring Can Help Reduce Stressors of Long Payment Terms
Invoice factoring is an alternative financing approach where your business sells your outstanding invoices to a third party (a factoring company) in exchange for cash up front.
Since this is a sale – not a loan – invoice factoring doesn’t impact your credit like traditional bank financing. It can be a valuable tool for businesses dealing with extended payment terms, allowing small businesses to unlock the cash value of their invoices long before their customers pay their bills.
This is a simple and effective way for business owners to alleviate cash flow constraints, allowing you to tap into and use the money you’re owed before the payment terms.
Net 60 Payment Terms FAQs
Still confused? Let’s address some frequently asked questions regarding Net 60 payment terms.
What does net 60 mean on an invoice?
Quite simply, net 60 on an invoice means that the buyer has 60 days from the invoice date to make the payment in full. It’s a payment term that’s often used in business transactions, allowing buyers two months to settle their invoices – providing flexibility for business owners navigating the challenges of cash flow management.
Which payment terms should I choose between net 30 vs. net 60?
Choosing between net 30 vs. net 60 depends on your specific business needs and cash flow requirements. Net 30 provides a shorter payment window of 30 days, which can be suitable for faster revenue turnover. However, net 60 offers a more extended payment period, providing buyers with additional time to manage their finances.
To make this decision, consider factors like your industry standards, client relationships, and cash flow projections. Then, decide which aligns best with your business goals.
Can invoice factoring help improve cash flow that’s been hindered by long payment terms?
Yes! Invoice factoring can be a valuable solution for businesses dealing with extended payment terms like net 60.
Invoice factoring involves selling your unpaid invoices to a third-party company at a discount in exchange for immediate cash. This can significantly improve your cash flow, allowing you to cover expenses, invest in growth, or simply gain a bit of peace of mind.
When do invoice payment terms start?
Typically, invoice payment terms begin from the date of the invoice. So, for net 60 payment terms, the 60-day countdown begins on the day the invoice is issued. It’s essential to communicate the invoice date clearly to your clients to avoid any confusion about when their payment is due.
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.