You’ll see expressions like “Net 30” and “Net 45” tossed about, but what do these mean in trucking or in business? Well, it has to do with payment terms (aka credit terms). Payment terms, like Net 30, are essential to include on an invoice because it documents and makes perfectly clear when a company expects to be paid. This minimizes any confusion that might result in late payments.
Where do I find or specify payment terms?
Payment terms should be specified up front in any contract or agreement between a customer and a vendor or service provider. When listed on an invoice, Net 30 means full invoice payment is due, at the latest, thirty days from the invoice date. For example, if an invoice is dated December 1 and it says, “Net 30,” then the payment is due on or before December 30. A vendor or service provider can communicate to the customer their desired payment terms according to when the vendor or service provider wants to be paid. However, some customers will push for payment terms that are not in perfect agreement with what the vendor or service provider desires.
Net 30 is perhaps the most common net term or credit term. But Net 30 is not the only term you’ll run into. You may also encounter Net 60, Net 90, and others. The term in the expression—net—refers to a time when receipt or possession will take place. The second part of the expression—30 in this example—refers to a set number of days within which the payment is expected to occur.
What is Net 30?
Net 30 is a credit term because it means services are sold in advance and the customer is allowed to pay by a later date, which in this instance is 30 days. Net 30 is basically an agreement where the customer has 30 days to pay your invoice in full.
You don’t have to use the same payment terms with every customer or every vendor. You may extend Net 30 or Net 60 to trusted customers who pay on time and then extend Net 10 or Net 15 to new customers or to customers who are notorious for paying late. You can even offer a discount to incentivize customers to pay by the requested date. For example, an invoice with payment terms or credit terms of Net 30 can offer a three percent discount on invoices paid within 15 days. This can be shown as “3/15, Net 30” or “3% 15 Net 30.” Understand that unless your terms are Net 0, you are basically providing free credit to customers. So, look at it this way, it’s highly unlikely that a bank would loan you money interest free for 90 days, 60 days, or even 45 days, for that matter.
By the way, there is always the Net 0 option and saying Payment Due Upon Receipt. In this instance, you don’t extend credit to your customers at all. You can specify “payment due on receipt” on invoices. This means payment is required as soon as the customer receives your invoice for any services that you’ve provided.
It’s good practice to list the payment term as well as an actual due date on the invoice.
Does Net 30 mean I’ll get paid within 30 days?
It depends. Net 30 requires a customer to pay an invoice within 30 days, but that doesn’t mean you’ll get your money in exactly 30 days. Again, most companies like to hang onto their cash for as long as they can, and if you agree to Net 30 terms, then many customers will pay that invoice on the 30th day after they receive your invoice. So, it depends on the day when you issue your invoice and it depends on the day when the customer issues payment and if they pay by check through the mail or by ACH or EFT (bank automated clearing house or electronic funds transfer).
A shipper might issue a check on the 30th day after you delivered the load and the shipper received your invoice for the load. Now it depends on when the shipper sends payment. The shipper may put a check in the mail on day 30 or maybe the next day. Then after that it depends on the speed of the postal service as to when you will actually receive payment. A new business needs access to cash in order to stay on top of expenses.
It’s also very possible that you will receive payments late that come in long after the due date. To avoid this from happening, you might charge a late fee for customers who pay late (e.g., pay after 30 days on Net 30 terms). This late fee is usually some small or low percentage of the invoice value, but enough to limit the risk or likelihood of receiving late payments. This late fee penalty needs to be clearly noted on the invoice.
This is why it’s important for you to understand payment terms and to pay close attention to things like customer (shipper, broker) credit and days to pay.
DAT’s Trucker’s Edge software shares credit scores and days to pay information on brokers that you might find useful.
What is days to pay? What does days to pay and days payable outstanding mean in trucking?
As the names or phrases suggest, days to pay are the days a company takes to pay its bills, while days payable outstanding is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices. A company with a higher DPO value takes longer to pay its bills. This means that the company holds onto its cash and retains available funds for a longer duration, thus allowing the company the opportunity to use those funds in more beneficial ways. However, a higher DTP measure or DPO value can be a red flag that signals an inability to pay bills on time.
Understanding payment terms (credit to your customers), the invoice, and days to pay are all crucial for starting and running your business. While it might seem like Net 30 is pretty much the standard or the norm, many new business owners and new trucking companies are often not aware that Net 30 isn’t a mandatory fixed thing. You can set terms to whatever you choose, you can extend terms to Net 60 or reduce terms to Net 10 or Net 15. Understand your customer's situation and the relationship you have with them. But do what is the most practical for your situation. Each term comes with its own set of advantages and disadvantages. The longer the net term and the days you allow for payment, the more incentive the customer has to use your service. BUT, the longer your payment is delayed, the more impact it has on your cash flow and your ability to pay your own bills and keep trucking.
To speed up your cash inflow, you might investigate factoring options.
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Soshaul Logistics LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It is meant to serve as a guide and information only and Soshaul Logistics, LLC - Copyright 2023 - does not assume responsibility for any omissions, errors, or ambiguity contained herein. You should consult your own tax, legal and accounting advisors before engaging in any transaction or operation.