Net 30, Net 60, Net 90: Payment Terms Explained for Small Business

# Net 30, Net 60, Net 90: Payment Terms Explained for Small Business

The first time I saw "2/10 Net 30" on a vendor invoice, I genuinely thought it was a math equation I was supposed to solve. It's not. But understanding what it means — and whether to take it — is worth real money.

Payment terms are the rules that govern when money changes hands between businesses. They seem boring until you realize they directly control your cash flow, your relationships with vendors, and whether your business can actually pay its bills on time. Get them wrong, and you're floating other people's businesses with your cash. Get them right, and you're using time as a financial tool.

What Payment Terms Actually Mean

Payment terms define when payment is due after an invoice is issued. The "net" number is the number of days.

Net 30 is the default in most B2B transactions. It's so standard that when someone says "standard terms," they usually mean Net 30.

Early Payment Discounts: Free Money You Might Be Missing

Early payment discounts are written as a fraction before the net terms:

2/10 Net 30 means: Take a 2% discount if you pay within 10 days. Otherwise, the full amount is due in 30 days.

Other common formats:

• 1/10 Net 30 — 1% discount if paid in 10 days
• 2/15 Net 45 — 2% discount if paid in 15 days
• 3/10 Net 60 — 3% discount if paid in 10 days

Why You Should Almost Always Take the Discount

Let's do the math on 2/10 Net 30:

You owe $10,000. If you pay within 10 days, you pay $9,800 (saving $200). If you wait the full 30 days, you pay $10,000.

You're essentially paying $200 to use $9,800 for 20 extra days (the difference between day 10 and day 30).

Annualized, that's a 36.7% interest rate.

The formula: (Discount % ÷ (100% - Discount %)) × (365 ÷ (Net Days - Discount Days))

= (2% ÷ 98%) × (365 ÷ 20) = 2.04% × 18.25 = 37.2% APR

Unless your business earns 37% annual returns on cash, take the discount. Always. It's the highest-return use of cash you'll find.

Even if you need to draw from a line of credit at 10% APR to pay early, you're still coming out 27% ahead.

Choosing the Right Terms for YOUR Business

When You're the Seller (Setting Terms for Your Customers)

Your payment terms should balance two things: getting paid quickly and not losing deals.

Require payment upfront or on receipt when:

• You're a new business without cash reserves
• The project requires significant upfront costs (materials, subcontractors)
• The customer is new and unvetted
• Your industry norm supports it (retail, many professional services)
• The project is small (under $1,000)

Offer Net 15-30 when:

• You're working with established businesses
• Your industry expects it (B2B services, wholesale)
• You have sufficient cash flow to wait
• The customer relationship is ongoing and reliable
• You want to be competitive with other vendors

Offer Net 45-90 when:

• You're working with large corporations (they often require it)
• The contract value is large enough to justify the wait
• You've factored the carrying cost into your pricing
• The customer's payment history is excellent

When You're the Buyer (Negotiating Terms with Vendors)

Ask for longer terms when:

• Your business is seasonal and cash flow is uneven
• You need time to sell inventory before paying for it
• You're a reliable payer with a track record
• The vendor is eager for your business

Take shorter terms when:

• Early payment discounts are offered (do the APR math)
• You have excess cash earning less than the discount rate
• Building a reputation as a fast payer opens doors

How Payment Terms Affect Cash Flow

This is where it gets real. Let's trace the cash flow impact of different terms on a business doing $50,000/month in revenue and $30,000/month in expenses.

Scenario: Net 30 Revenue, Net 30 Expenses

After the first month's delay, cash flow stabilizes at +$20,000/month. Manageable.

Scenario: Net 60 Revenue, Net 30 Expenses

You're in the red for two months. You need $30,000 in working capital just to survive until cash flow normalizes. This is exactly how profitable businesses fail.

For a complete model of scenarios like this, check out the cash flow forecasting guide.

Scenario: Net 30 Revenue, Net 60 Expenses (The Dream)

When you collect faster than you pay, you have a cash flow advantage. This is how Amazon built an empire — they collect from customers immediately and pay suppliers 60-90 days later. That float funds the entire operation.

The True Cost of Extending Credit

When you offer Net 30 to a customer, you're essentially giving them an interest-free loan for 30 days. That has a real cost.

The math:

• Invoice amount: $10,000
• Your cost of capital: 10% APR (what you'd earn or save if you had the cash now)
• Cost of 30 days of credit: $10,000 × 10% × (30/365) = $82

For a single invoice, $82 doesn't seem like much. But if you have $200,000 in outstanding receivables at any given time:

• Annual carrying cost: $200,000 × 10% = $20,000/year

That's $20,000 in real money you're losing by extending credit to your customers. Factor this into your pricing.

And that assumes they pay on time. If your average collection period is actually 45 days on "Net 30" terms (very common), the cost is 50% higher.

Credit Checks: Protecting Yourself Before Extending Terms

Before offering Net 30+ to a new customer, especially for large amounts:

1. Ask for trade references. Call 2-3 of their other vendors. "Do they pay on time?"
2. Run a business credit check. Dun & Bradstreet (D&B), Experian Business, or Equifax Business. Costs $30-$100 per report.
3. Start with smaller orders. Offer Net 30 on the first $5,000 order. Once they pay on time 2-3 times, extend for larger amounts.
4. Set a credit limit. Even for good customers. "We'll extend Net 30 on up to $25,000 in outstanding invoices."
5. Get a personal guarantee. For larger accounts with newer businesses, the owner's personal guarantee adds a layer of security.

Negotiating Payment Terms

With Vendors (Getting Better Terms)

What to say:

> "We'd like to move to Net 45. We've been paying on time for six months and our order volume is growing. Net 45 helps us manage cash flow and lets us increase order size."

Leverage points:

• Payment history (always pay on time before asking for longer terms)
• Order volume (bigger orders = more negotiating power)
• Long-term commitment (annual contracts in exchange for better terms)
• Industry data ("industry standard for our sector is Net 45")

With Customers (Negotiating Faster Payment)

Offer incentives for faster payment:

• Early payment discounts (1-2% for paying within 10 days)
• Priority service or faster turnaround for prepaying customers
• Volume discounts tied to payment terms

For slow-paying customers:

> "We love working with you, and we'd like to continue. Our standard terms are Net 30, and we've noticed invoices are consistently arriving around day 50. Can we discuss adjusting the terms or figuring out what's causing the delay?"

If they need more time, consider adjusting your pricing to account for the extended terms. Net 60 at a 3% premium is a fair exchange.

Industry Norms

Payment terms vary significantly by industry:

Don't fight industry norms unless you have a good reason. If everyone in your space does Net 30 and you demand prepayment, you'll lose deals to competitors. If everyone does Net 60 and you offer Net 30, make it a selling point.

Structuring Payment Schedules for Large Projects

For projects over $5,000-$10,000, a single payment at the end is risky for both sides. Use a milestone-based payment schedule:

Common Structures

50/50:

• 50% upfront (deposit)
• 50% on completion
• Best for: Simple projects, established clients

30/30/30/10:

• 30% upfront
• 30% at midpoint milestone
• 30% at completion
• 10% held for 30 days (retainage — guarantees you'll fix issues)
• Best for: Construction, large design projects

Monthly retainer:

• Fixed amount due on the 1st of each month
• Work continues as long as payment continues
• Best for: Ongoing services, marketing, maintenance

Progress billing:

• Bill based on percentage of work completed
• Common in construction and consulting
• Requires clear scope definition to measure progress

For detailed invoicing strategies, check the complete invoicing guide.

When to Require Upfront Payment

Don't feel guilty about asking for money upfront. These situations call for it:

1. New customers with no track record. They haven't earned credit yet.
2. Projects with high material costs. You shouldn't finance their project.
3. Custom work that can't be resold. If they bail, you're stuck with unsellable output.
4. International clients. Collections across borders is nearly impossible.
5. One-time engagements. No ongoing relationship to protect.
6. You've been burned before. Past due invoices from this client? Prepayment going forward.

How to frame it:

> "For new engagements, we collect a 50% deposit to secure your spot on our schedule. The remaining 50% is due on completion. Once we've worked together a few times, we can discuss terms."

No reasonable client objects to this.

Late Payments: What Happens When Terms Aren't Met

Late payments are the inevitable consequence of extending credit. You need a plan:

1. Day 1 past due: Friendly reminder email ("Just a heads up, invoice #1234 was due yesterday...")
2. Day 7: Follow-up with a phone call
3. Day 14: Firmer email, mention late fees if applicable
4. Day 30: Formal demand, consider pausing work
5. Day 60+: Collections process begins

For detailed scripts and legal options at each stage, read the late payments guide.

Late Fees

You can charge late fees, but check your state laws:

• Most states cap late fees at 1-1.5% per month (12-18% annually)
• The fee must be stated in your contract or on the invoice BEFORE the sale
• You can't retroactively add late fees
• Some states don't allow late fees at all for certain transaction types

Include late fee language on every invoice and in every contract. Even if you rarely enforce it, it motivates on-time payment.

Payment Terms in Your Contract

Your payment terms should be in writing — in your contract, engagement letter, or at minimum on your invoices. Include:

1. When payment is due (Net 30, due on receipt, etc.)
2. Accepted payment methods (ACH, check, credit card, wire)
3. Late fee terms (percentage, when it kicks in)
4. Deposit requirements (if applicable)
5. What happens if payment isn't received (pause of work, interest accrual)

Download the Payment Terms Policy Template for ready-to-use language you can drop into your contracts and invoices.

The Bottom Line

Payment terms are a strategic tool, not an afterthought. They directly control when cash enters and leaves your business. The difference between collecting in 30 days vs. 60 days — on $50K/month in revenue — is $50,000 in working capital you either need or don't.

Three rules:

1. Always take early payment discounts when offered (the math is overwhelmingly in your favor)
2. Match your terms to your cash flow reality — don't offer Net 60 if you can't survive the float
3. Put everything in writing before work begins — not after the invoice is overdue

And keep your cash where it earns something while you wait. Your Holdings business checking account pays 1.75% APY — on a $50,000 average balance, that's $875/year in interest just for having your operating cash in the right place.

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*Jason Garcia is the CEO and co-founder of Holdings — AI-native business banking with free checking, AI bookkeeping, 1.75% APY, and up to $3M FDIC insurance through our banking partner, i3 Bank, Member FDIC.*