The Quick Guide to Using Net Terms to Support Business Growth

Net terms allow buyers and sellers to optimize cash flow and scale more efficiently. Learn the benefits and challenges of extending trade credit to buyers.
Written by:  Nikki Blank
Last Updated:  November 10, 2023
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Flexibility is key to enabling business and building partnerships, and establishing payment terms is one of the greatest sources of flexibility for businesses. The option to schedule payments and manage cash flow directly impacts a company’s revenue creation and profitability. This is why many buyers seek flexible payment terms when selecting vendors.

In response to this demand, many B2B and invoice-based businesses offer their customers flexibility through the use of net terms. When sellers extend net terms to qualified clients, both parties benefit from a more consistent cash flow that enables growth.

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The extension on traditional pay-on-receipt invoicing allows customers more time to use their purchased supplies, generate revenue, and expand operations. It helps smaller businesses pay invoices without running into cash flow problems or putting large amounts on a business credit card and accruing interest.

Today we share an overview of net terms

What are net terms?

Net terms — also referred to as trade credit — is the payment period a supplier offers a customer to pay their invoice. It is typically expressed as a number of days after the invoice date, such as a “net 30 payment.” In this case, the customer must pay the full amount within 30 business days of receiving the invoice.

How do net terms work?

Net terms are an agreement between the buyer and supplier. The net terms agreement has several components. 

Term: The term is the number of days before payment is due. Terms are determined by the vendor and accepted by the buyer. 

Interest: With net terms, a set amount of interest accrues for payments made beyond the net payment date. This may be any rate set by the supplier, up to the amount allowed by law. Usually, the average monthly finance charge on net terms is 1 to 2 percent. 
Discount: Many vendors choose to incentivize payments by rewarding early repayment. Vendors set a net discount as a percentage off an invoice total for payments made within the early payment window. For example, a vendor may offer a 3 percent discount on invoices paid in the first 15 days of a net 30 agreement. If you set net 60 terms, a 30-day early payment option may be appropriate.

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Steps involved in the net terms process

Setting net terms for a repayment agreement is a straightforward process. Typically, you can expect the following steps:

  1. Check history: For existing clients, consider their payment history before establishing net terms. For new clients, use a credit check (through Dun & Bradstreet, Moody’s, or a similar credit bureau) or check references to establish credit score and worthiness for the extension.
  1. Set terms: At the commencement of services, the agreement outlines the early or on-time invoice amount, repayment terms, late fees, and early payment discounts to apply. 
  1. Submit invoice: Once the supplier fulfills the order, they send an invoice. Sometimes the repayment grace period begins as of the invoice issuance date. Other times the clock starts on the postmarked date or date of invoice receipt.
  1. Early payment: If the buyer pays the invoice within the allotted early repayment period, they pay an incentive amount that includes savings according to the terms of their contract.
  1. On-time payment: For payments within the normal payment window, businesses pay the regular invoice total. 
  1. Late payment: If a client goes past the net terms payment window, a finance charge applies.

Types of net terms

Net terms are usually set at 30, 45, 60, or 90 days after the invoice, though sometimes businesses negotiate extended terms. Some industries have customary net terms expected by  most suppliers and buyers. 

Setting a net terms interval should balance supporting buyers with flexibility and meeting your internal business needs and goals. Setting net terms that are too long may provide an unnecessary amount of free financing to buyers and jeopardize your internal cash flow. 

Invoice terms that are too short may make your company appear cash-poor or inflexible. Net 30 repayment terms are widely accepted and recognized. Follow your industry’s guidelines for extending terms on a 60- or 90-day basis.

Benefits of net terms

Vendors extend trade credit to their customers to add flexibility to the transaction while maintaining stability in internal finances. Most companies recognize the value of net credit terms arrangements and their specific benefits, which include: 

  • Improved cash flow for customers, since buyers do not have to pay immediately
  • Higher customer satisfaction due to more convenient payment terms
  • More customer loyalty from customers who benefit from the extension
  • Increased sales revenue by attracting new customers who need flexibility
  • Improved relationships with buyers who benefit from a supportive supply partnership
  • Enhanced ability to offer discounts or incentives for early payments

Disadvantages of net terms

Despite the prevalence of net terms and buyer preference for extended payment, there are some risks to consider when setting net terms for your business, such as: 

  • Increased risk of nonpayment or late payments, which increases risk of cash flow problems
  • Need for additional administrative overhead to monitor payments and determine credit limits
  • Possibility of customers taking advantage by delaying payments or asking for extended terms
  • Difficulty collecting on overdue accounts without damaging customer relationships
  • Capital and cash flow challenges due to late or non-paying customers
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Types of businesses that offer net terms

While some consumer-focused companies like Affirm and Klarna offer longer payment terms through “buy now, pay later” platforms, most companies that offer trade credit work with other businesses. Three of the most common places you’ll see net terms include:

B2B companies: Companies that primarily offer services and products to other businesses often agree to net terms. This strategy helps them secure more customers who may not have the funds available to pay upfront and allows their customers more flexibility.

Invoice-based services: Companies that issue net term invoices versus pay-on-receipt billing often extend net terms to customers. While some companies need payment on receipt or at the end of the month (EOM), customers may expect the flexibility of extended terms for larger invoice balances. 

Product and parts sellers: Retailers that sell finished products or components (for example, parts for automobile repair) often extend terms to their customers. This allows the buyers to get parts in stock, generate revenue from sales or repair services, and use the proceeds to pay off the invoice on time. 

The type of extended terms and discounts you’ll find depends on the region and industry of each business.

How net terms affect your cash flow

Healthy businesses are all about cash flow, and if done properly, net terms boost your business's cash flow. Net terms affect businesses on both sides of the table. 

Buyers: Net terms attract buyers looking to maximize their working capital. They allow the buyer to get supplies in the door without tying up cash. With materials in hand, they can produce and sell their product or service, bring in cash, and pay their bills on time. Net terms are especially important for startups and small business owners relying on credit to get supplies and drive revenue. 
Sellers: Vendors who offer net terms gain access to a wider range of customers. Instead of relying only on cash-rich clients with more established businesses, they expand their services to young, innovative companies that need services and tools to scale. Provided these clients pay in a timely manner, this diverse client base increases cash flow. Offering early payment discounts benefits both parties—buyers can be more cost competitive and retain working capital, while sellers get revenue in-house faster.

Use to enhance the benefits of net terms

A procurement management platform with flexible payment options helps buyers and sellers maximize their working capital. It facilitates access to a network of high-quality products and vendors, with terms that make it easier for businesses of any size to streamline their procurement and accounting processes. provides features that make life easier for buyers and sellers by offering: 

  • Access to both standard and extended net terms and cash advance options for flexible buying through the Order Capital program
  • Universal terms so customers can always expect 30 days to pay with no fee, plus extended terms options for businesses of any size 
  • Fast credit approval with decisions rendered in 2 to 3 business days and no paperwork
  • Revenue-friendly terms that allow growing businesses to scale first, pay later

To see in action and improve cash optimization and accounting for your business, schedule a demo.

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