Net 30 is a popular payment process that large companies all over the world favour. However, for some reason, it has now become commonplace for small businesses around the world as well. So how does this affect freelancers? Let’s find out!
- What is Net 30?
- Common Arguments for Net 30 Payment Terms
- Why is Net 30 bad for freelancers?
- When should you consider Net 30 as a freelancer?
- Tips for Managing Net 30 Payment Terms
- Net 30 Payment Terms – An Example
- Alternatives to Net 30 Payment Terms
- Conclusion
What is Net 30?
Net 30 as a term means that payment is due 30 days after an invoice is issued. Now, from the definition, you can see that net 30 payment terms can be very good for a client. But is it also good for freelancers?
In this article, we’ll discuss the most common arguments made in favour of Net 30, disadvantages, things to consider and more.
Common Arguments for Net 30 Payment Terms
Let’s talk about why some people argue for Net 30 payments before we get to the cons of it. Some of the most common reasons why people prefer Net 30 payments include:
#1 Standard industry practice
Net 30 is a standard industry practice that is used by lots of large companies. To improve their chances of winning contracts with large organisations, freelancers tend to relax their payment terms for fear of losing out on the contract.
In addition, by offering Net 30, freelancers can be seen as aligning with established business practices and expectations.
#2 Simplified billing processes
Net 30 is a simple, straight-forward process which demands payment exactly 30 days after the invoice date without additional calculations. The billing process is arguably simpler than other payment methods.
#3 Builds trust with clients
Offering credit terms to your clients can help establish both trust and loyalty, and can result in a long-term relationship. Clients will often choose to work with a freelancer depending on how easy their payment terms are. Offering net 30 can help ensure they choose you over another freelancer.
Why is Net 30 Bad for Freelancers?
Now let’s take a look at the disadvantages of Net 30 for freelancers:
#1 It hurts your finances
As a freelancer, you’ll rarely be sitting on a huge pile of money that you can just give out to people and then afford to wait for them to pay you back.
Small businesses, which the vast majority of freelancers qualify as, cannot afford to wait one month for a payment. You have regular financial obligations that you need to cover. In terms of finances, Net 30 can lead to:
1) Cash flow challenges
If your freelance business has a limited cash flow, and chances are that it does, you might want to consider an alternating form of payment. Waiting 30 days for payment can put a strain on your cash flow, especially if you have other payments upcoming or bills due.
2) Increased financial risk
Net 30 payments add complexity to your finances that you just don’t need. As a freelancer, you’re bound to have to deal with slow payments and other collection issues. This can generate losses and can be a source of financial problems and risk.
3) Difficulty in covering expenses
Think of yourself as a grocery store – you can’t just allow someone to buy a piece of bread and pay for it thirty days later. No, you need that payment as soon as possible, because you have to order new bread, pay your employees, etc.
In your case, that’s paying your bills, investing in resources, and much more.
2. Clients will tend to pay at the very last second
It is an unfortunate reality that telling a client “pay me in 30 days max” will often result in them paying you in 30 days at the earliest.
Doing something at the very last time can be attributed to laziness, but it can actually be a profitable financial decision from the perspective of your client. Assuming they are a bigger business, they stand to gain an advantage from paying you later.
Net 30 allows clients to keep their cash longer, which accounting-wise can improve cash flow.
If you had instead adopted Net 10 (payment due 10 days after the invoice date), even the biggest of delays wouldn’t be as bad as your Net 30 payment term.
3. There’s often confusion about when Net 30 begins
Net 30 is not as clear-cut of a term as you might think it is. There are various options of where it begins.
Generally, it begins from the date when the invoice is issued. However, some clients might not know that. They will think the 30 days begin from when they actually receive the invoice.
An even worse scenario– imagine your client working for an even bigger client: They might consider the beginning of Net 30 to be once they get their payment themselves.
When should you consider Net 30 as a Freelancer?
There are few times when Net 30 can make sense as a payment method for you.
1. When you can afford it
You should consider Net 30 as a payment when you can really afford it. There are basically two possibilities here:
- Number one: The project and thus the payment is so small that it won’t make a difference in your budget.
- Number two: Your current financial situation is so great that even a medium-sized payment can wait.
But remember, just because you can afford to wait 30 days doesn’t mean you should.
2. When you trust your clients a lot
As we discussed, waiting 30 days is a huge no-go when dealing with new clients. You don’t know how they operate and whether or not they will uphold their end of the deal – in short, you probably can’t trust them.
But you can probably trust clients who you’ve been working with for a long time, who you like working with and have developed a healthy business relationship over the years.
They might be worth giving some extra leniency if they ask for it. Obviously, if step one isn’t fulfilled and you can’t afford to wait 30 days, you’ll have to prioritise your own financial survival. But if, and only if, both step one and two happen to align, you can consider Net 30.
Tips for managing Net 30 Payment Terms
If you decide that Net 30 is something you want to offer your clients, here are a few tips that you can use to manage payment terms:
#1 Set clear expectations with clients
Sit down with your client when you’re figuring out your contract and set clear expectations right from the start. Let them know when the Net 30 period begins and what the penalties for late payments are.
#2 Establish a consistent invoicing system
Utilising the right software or tool can help you establish a consistent invoicing system. Not only can you send out invoices on time, you can even send automated reminders to your clients as the payment due date approaches.
#3 Follow up promptly on overdue payments
It’s crucial that you develop a clear procedure for handling late payments. This will include follow-up calls, reminder emails, a strategy for penalties, and so on. You can begin by sending in polite reminders to your clients. These can be via phone call or email. If these go unanswered, consider applying a late payment charge as outlined in your net 30 payment terms.
If all else fails, consult with legal counsel to explore options to receiving payment.
Net 30 Payment Terms – An Example
Invoices usually contain the date of sale, goods or services purchased, payment terms and more. The section under ‘payment terms’ is what we need to be concerned with here.
This refers to the conditions under which the client has to pay-off the full value of the invoice. In this case, you will need to mention Net 30 under the payment terms.
Alternatives to Net 30 Payment Terms
If you’re looking for alternative payment terms, consider the following tips:
#1 Negotiate shorter payment terms
Instead of Net 30, you can choose to implement Net 10 or even Net 20. Net 10 means that full payment is due 10 days after the invoice date, whereas Net 20 means the same but payment is due within 20 days.
You can also choose to offer your clients early payment discounts. Here, the Net 30 payment terms will remain the same but the early payment discount offer can vary. For example, the most common term is 2/10 Net 30. This simply means that if your client pays within 10 days, they will receive a 2% discount.
#2 Implement payment milestones
Milestone payment is a time based billing and invoicing structure that is especially popular in the professional services industry. Milestone payments are a smart way of breaking down your work and adding clarity, trust and communication to your relationship with your client.
You can set up payment milestones on the 10th, 20th and 30th day with your client, giving them plenty of time in between payments.
#3 Request upfront deposits
Last but not least, you can ask your clients for a deposit upfront. Not only will this help you with cash flow and reduce your financial risk, it also shows your clients that you take your business seriously.
By requesting upfront payments, you’re communicating to your client that you are a legitimate business with payment processes in place.
Conclusion
Net 30 is a payment process that gives your client 30 days to pay their invoice balance. While this may be useful for businesses selling to other businesses, it can prove to be disadvantageous to freelancers. Not only can it cause cash flow problems, there is also a risk of non-payment by your clients – especially if they’re someone you’ve never worked with before.
However, you can always advocate for fairer payment practices such as negotiating shorter payment terms, implementing payment milestones, and so on.
Keep in mind that every freelance business is different. If Net 30 is a standard in your industry, then it may be expected from you as a default. On the other hand, if you find that you can improve your cash flow with a more favourable payment term, there’s no reason not to consider it.
Also remember that one payment term does not need to fit all of your clients. You could offer distinct payment terms with different clients, depending on the kind of services you offer and the relationship you have with that client.
If you are struggling with your finances, you might also want to check our financial management tips for freelancers!
