Net 30 Friend or Foe

One of the many aspects of being an entrepreneur is being paid for products or services sold to a client. This concept is not always a cut and dry process; however, in many cases there are usually no issues receiving payments owed. A typical payment method that many business owners face in working with a company is a purchase order agreement (PO). For an entrepreneurial newbie this may seem a bit foreign.

Purchase orders are another way for companies to receive invoices for a service rendered and are often the case where a check payment is the result. However, this type of payment is not as simple as reaching into one’s checkbook and tearing out a check. Instead it is a process of payment terms and check printing. Many people may have heard of Net 30 payment terms. However, those same people, including myself starting out, do not understand what that means, exactly. 

The term Net 30 basically means that from the date the invoice (your invoice) is received by the company (the client) a proverbial clock begins counting 30 calendar days from that invoice receipt until the company sends you a check. So if you sent an invoice on November 1st you would not get paid until 30 days later on November 30th. This count also includes each weekend and holiday. There are also terms available like Net 15 or Net 10. Traditionally, companies default to the Net 30 term, so it is important to ask what the payment terms are when approached with the request to pay by purchase order up front. This lets you know what you are getting into payment wise.

The “Net” payment terms sounds very similar to a line of credit, right? In essence that is just what it is; a way for the company to go ahead and order the work or product needed and get it down the pipeline while being able to hold on to their payment up until the 30th day after the invoice is sent. This is very concerning for small businesses and freelance entrepreneurs. Unlike many major corporations the daily cash flow is either very limited or dictated by receivables coming into the company. 

To protect small businesses it is a must to write a payment term plan when it comes to being paid by purchase order. If the terms are not negotiated before the work starts the entrepreneur may be faced with a 30 day wait to get paid for the work provided. It is perfectly OK to ask the potential client who wishes to pay via PO to review and even sign off on your payment agreement terms. My recommendation is to require the client to pay per a Net 15 basis, especially if you are a small firm. Anything longer than this could deeply impact the daily operation of the business when there is a cash shortage to pay yourself or employees. 

When a company declines a Net 15 term request and insists on a Net 30 payment plan; it is important to take into consideration any issues that would result when having to wait for payment for extended periods of time. This means that if you have no other choice but to agree to a Net 30 plan, negotiate a fee that is associated with each invoice. Whether the fee is a flat rate or a minimum number of hours that will be charged in addition to other hours worked.

Whichever the case you find yourself in, it is important to take a look at the whole picture and get any agreement in writing. If this is not done up front it is not as easy to enforce payment rules or requests later. Taking a bit of time beforehand will go far in helping the business owner enter into a successful and profitable relationship with a client.

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