One of the most ubiquitous invoicing payment terms in use by businesses of all sizes (small, medium, large and enterprise) is Net 30. This is in fact a standard in the business world for many good reasons. However, it may not be as effective for freelancers as it is for traditional businesses.
Net 30 is the standard payment terms with many upsides, but there are also many pitfalls to watch for.
Today we’ll look at the advantages and disadvantages of Net 30 for freelancers, as well as how you can protect yourself against the worst parts while enjoying the best ones.
What exactly is Net 30?
The payment term Net 30 is actually a type of short-term credit that one business (the supplier) extends to another business or individual (the client).
The ‘30’ in Net 30 stands for 30 days, meaning that the client has 30 days to pay the invoice in full that you’ve submitted.
The reason this is a type of short-term credit is that you are actually allowing the payment of the goods or services to be delayed by 30 days.
This 30-day period is a default in many areas, including in the UK where clients are legally obliged to pay invoices within 30 days, unless otherwise agreed between the parties.
Why would I use Net 30?
If you are the supplier, you may be wondering exactly what the benefits of Net 30 are to your business.
Discussing these benefits would be the same at looking at why Net 30 is the default in the business world.
In short: it provides an incentive for your client to use your services or purchase your products. The important thing to remember in this equation is that the act of delaying the payment by a maximum of 30 days allows your clients to keep their cash for longer.
This is a strong incentive for individuals, as delayed payment reduces the pain points of buying.
If your clients are businesses, it allows them to delay their cash outflows, which means that they have greater cash flow in general. With better cash flow, they are more able to meet their regular financial obligations.
So what’s wrong with Net 30?
For all the good that Net 30 brings, we must first look at exactly whom Net 30 is good for.
The answer is normally: larger businesses that have multiple clients. The reason why this is important is that with a rotating cycle of clients, they have rotating incoming payments. This allows them adequate cash flow to meet their financial obligations consistently.
However, for freelancers, this is unfortunately not the case. Most freelancers generally have far fewer clients. Even worse, some just starting out have only one or two main clients.
This means that if those clients delay their payments once, twice, or more times, those freelancers could fall into very difficult times.
One important thing to remember about Net 30 when it comes to freelancers is that many clients don’t know when the 30 days begin.
Is it 30 days from the date the invoice was issued? From the date the goods or services were delivered?
Or is it 30 days from the day the client gets paid from his or her client? If that’s the case, then you may have to wait even 60 days or much longer for your payment.
If that is your main client, you’ll probably have to continually extend credit and wait for the best. The other option is to take your client to small claims court or just cut your losses—both bad options.
How to make Net 30 work for you
Net 30 doesn’t have to be all bad, however. In fact, it can be quite effective if you follow certain steps.
#1 Agree on the payment terms
The first thing that you’ll probably want to do is to agree with your client on exactly when the 30 days in Net 30 begins.
If you have this agreement with your client, you can avoid all those challenging problems. Furthermore, you can use the agreement as a way to remind your client of his or her duty to pay your invoice on time.
#2 Use Net 21 (or Net 15)
You don’t have to extend short-term credit for that long if it means your business will suffer. Instead, you should make your payment terms shorter.
Instead of Net 30, why not try Net 21 or Net 15?
Of course, although this means you’ll get paid faster, it also lowers the incentive for your new and old clients to purchase from you.
#3 Add late fees
One big reason that your clients may be very loose with the definition for Net 30 is that there may not be any ‘punishment’ for paying later than 30 days.
Net 30 doesn’t mean interest-free forever, and you should be sure to add on a percentage late charge for each week or month the invoice is past due.
#4 Don’t give Net 30 to new customers
Lastly, you can protect yourself from Net 30’s dark side by making sure only trustworthy clients get Net 30 extended to them. After your client has made regular payments for your goods or services, then you can move him up to Net 30.
In the meantime, you can start with a lower term, such as Net 15 or even Net 10. After 3 successful, timely invoice payment, you can upgrade your client to Net 30.
With these four steps, you can make sure that your Net 30 invoice payment terms are not a drain on your business.
In fact, Net 30 should boost your freelancer financial situation, which is exactly what I’ve shown you here today.