Net 60 Payment Terms Explained
All the Essentials You Need to Know
Updated October 31, 2020
Having a positive cash flow for day-to-day operations is the lifeline for many small businesses. However, finding reliable sources of traditional financing has been quite challenging in today's environment. Oftentimes, most businesses overlook a major source of financing from their suppliers - net D financing. Net D, also known as vendor credit, supplier credit, and trade credit, is a form of trade credit where the net amount (total outstanding on the invoice) needs to be paid in full by the buyer within a set number of days(D) from the invoice date. Obtaining net 60 payment terms is one of the best net payment terms option many businesses can utilize to help them better manage cash flow.
Learn more about net 60 payment terms in this guide
- What does net 60 mean?
- The pros and cons of net 60 payment terms for buyers
- How to get approved for net 60 terms?
- The pros and cons of net 60 payment terms for suppliers
- Why suppliers offer net 60 vs. net 30 payment terms?
- Should I offer all my clients net 60 payment terms?
- Net 60 payment discounts
- Calculating the cost of trade credit for net 60 payment terms
- What is included in net 60 payment term letter?
Net 60 means that the buyer has 60 days from the invoice date to pay the net total amount before the bill is overdue. Typically, a buyer has to apply for a trade account, also known as net account, with the company in order to purchase products and services on credit. The payment terms for these accounts are that the buyer has to pay back the company within 60 days time or be subjected to interest or other penalties.
For example, if a company decides to give their business clients trade credit and offer net-60 terms, then that means the client needs to pay the total amount in 60-days time. Some suppliers will offer discounts to encourage the client to pay sooner, or interest fees will accrue on each day the payment is late.
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There are pros and cons to accepting net 60 payment terms as a buyer, and it’s important to understand each before agreeing to the terms.
Pros of net 60 payment terms - buyers
The pros of using net 60 payment terms as a buyer are:
- You can delay paying for goods or services for sixty days.
- You can take advantage of early payment discounts if offered.
- As long as you pay within 60 days, you won’t gain any interest.
- There isn’t a lengthy, tedious application process.
- Doing this can bridge cash gaps for your company if you spread out your account payables.
Cons of net 60 payment terms - buyers
The cons of using net 60 payment terms as a buyer are:
- If you pay the invoice late, you will owe interest on your original payment.
- By not taking advantage of early payment discounts, you’re paying a high interest rate.
- By not paying on time, you put the supplier’s business at risk.
To be approved for net 60 terms, the supplier may ask you to fill out a credit application, which can include your company’s name and address, banking relationships, commercial references, and supplier references. The supplier will want to make sure that you have good credit that demonstrates your ability to make on-time payments by checking your references.
Suppliers may also check commercial credit reports if you do not want to fill out the credit application. They will check to see your track record of paying past or current vendors. It’s important to remember that some businesses will not want to give you a net 60 term payment plan if your credit is not reliable.
As a supplier, you will face more pros and cons than a potential buyer. It’s critical to outweigh the pros and cons before offering net 60 payment terms to your customers. The pros and cons are as follows:
Pros of net 60 payment terms - suppliers
The pros of offering net 60 payment terms as a supplier are:
- You can gain more clients, which can lead to a more diverse client portfolio.
- By offering discounts for paying their net amount earlier, you can gain client retention and customer loyalty.
- Your relationship with your clients will be stronger overtime as you put your trust in them to pay their net amounts later on. This will lead to them telling others about your business.
- You will have a competitive advantage over your competitors by extending the amount of time your customers have to pay you back.
Cons of net 60 payment terms - suppliers
The cons of offering net 60 payment terms as a supplier are as follows:
- The client may pay late which can negatively affect your business’ cash flow.
- Late or non-paid payments can lead to your business accruing debt.
- You will have to deal with additional accounting work by having to keep track of who’s paid, who hasn’t, who’s paid late, and who’s using the early payment discounts.
- When clients use early payment discounts, your margins become thinner. This also applies when you work with collection agencies to recoup late payments.
Suppliers should take a look at their client base to determine if they should offer net 60 payment terms or net 30 terms. Larger companies prefer to delay payments by 60 or 90 days because they want to slow down their payable accounts. Doing so allows the business to have more cash on hand which means bigger profits.
Some companies have terms and conditions in place that require them to have a certain net payment term, and as a supplier, you’ll have to determine if you want to honor those terms or not. Suppliers also offer different net terms depending on cash flow management. If a supplier needs to have more consistent cash flow, they may offer a net 30 payment term so they can get paid more often. If the supplier can wait longer on being paid or if they trust the client’s creditworthiness, they may extend out the payment terms to a net 60 plan.
Suppliers should only offer their clients net 60 payment terms if they’ve evaluated the client’s creditworthiness and if having constant cash flow isn’t a major necessity. Remember, with a net 60 payment plan, your client isn’t obligated to pay you for 60 days, so make sure before offering these terms that your business can survive and run without any issues with strained or limited cash flow. Your clients will appreciate net 60 payment terms, but make sure it’s a beneficial move for your business as well.
What does 2/10 net 60 mean on invoice?
2/10 net 60 on an invoice means that the buyer is eligible to receive a 2% discount on trade credit if the amount due is paid within 10 days. After the first 10 days, the full invoice amount is due in 60 days without the 2% discount according to the terms for 2/10 net 60.
What is an early payment discount?
An early payment discount is a form of trade finance that gives companies the opportunity to receive a discount on vendor invoices if they pay before the deadline. Early payment discounts can benefit the supplier and the buyer. This method allows the business to pay less than the full amount, and the supplier gets paid earlier than the agreed-upon deadline.
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2/10 Net 60 and other early payment discounts
2/10 Net 60 means receiving a 2% discount as long as the amount is paid in 10 days. There are other trade terms like this that are commonly used on vendor and supplier invoices such as:
- 3/10 net 30 means 3% of an early payment discount is applied if the total amount due is paid within 10 days of the 30-day deadline.
- 3/20 net 60 means 3% of an early payment discount is applied if the amount is paid in 20 days; if not, then the total amount is due in 60 days without the discount.
- 2/EOM net 45 means that 2% of an early payment discount is applied if the amount is paid by the end of the month. If not, then the total amount is due in 45 days without the discount.
You can use this formula to calculate the cost of taking (or not) a trade discount to calculate the cost of trade credit for net 60 payment terms:
Discount Percentage ÷ (1-Discount %) x [360/(60 - Discount days)]
If you decide to use net 60 as a payment option, you will usually have to sign a payment terms letter with the vendor. A net 60 payment terms letter will lay out how, when, and under which conditions the vendor needs to get paid back.
The net 60 payment terms letter will usually include:
- How many days you have to pay the invoice (in this case it will be 60 days)
- Early payment discounts (if applicable)
- Late fees or penalty interest if not paid on time
- List of accepted payment methods
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