Definition
The number of days a customer has to pay, such as net 30 or net 60.
Why it matters
Longer net terms increase the need for working capital.
Where it shows up in a deal
Net terms are printed on the invoice, negotiated with the customer, and then quietly ignored by a share of your ledger. Underwriting compares the terms you grant with the days your customers actually take, and prices the second number. Terms are also where a large buyer exerts leverage, often extending them unilaterally at renewal.
What it affects
- Each extra 30 days of terms adds roughly one financing period of cost to every invoice.
- Longer terms raise the receivables balance you have to carry at steady state.
- Terms granted inconsistently across customers make the ledger harder to underwrite.
- A buyer extending terms from net 30 to net 60 is a real price increase, whether or not it is called one.
A worked example
At $300,000 of monthly billing, net 30 leaves roughly $300,000 outstanding at steady state while net 60 leaves roughly $600,000. The extra $300,000 has to be funded from somewhere, and at 1.5% per 30 days financing it costs about $4,500 a month.
The common mistake
Related terms
- Days Sales OutstandingThe average number of days it takes to collect payment after a sale.
- Discount RateThe fee a factor charges, usually expressed per 30 days or per 10-day increment.
- Early Payment DiscountA discount offered to customers who pay before the due date, such as 2/10 net 30.
- Working CapitalCurrent assets minus current liabilities — the cash available to run daily operations.
Questions about how net terms affects your facility?
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