Trade credit, which is essentially a line of credit offered to commercial clients, is often referred to as Net 30, meaning that you are extending a line of credit of 30 days for your clients to pay their invoices.
This is a common type of commercial transaction, and many of your commercial clients will appreciate the courtesy of Net 30 terms. If you extend this line of credit, however, you must be aware of both the pros and cons so that you can best plan your Net 30 terms.
What is Net 30?
Net 30 allows your commercial clients to pay their invoice within 30 days of receiving it. The 30 days typically start when the client receives the goods or when the service is completed. Net 30 terms usually also include an incentive to the commercial client for paying early, such as offering a small discount if they pay the invoice within five or 10 days.
Most Net 30 terms require that the client pays the invoice in full by the 30th calendar day of the dated invoice. In addition, Net 30 terms are usually coupled with an interest charge should the client not meet the Net 30 terms.
Should you offer Net 30 terms to all of your clients?
Not necessarily. You may want to research your client before extending Net 30 to them for a variety of reasons. Mainly you want to make sure your client is credit worthy and has a good track record of paying their invoices on time.
You can either obtain a commercial credit report from Dun and Bradstreet or Smart Business Reports which will detail any liens and judgments the client might have against them. But, perhaps more importantly, a commercial credit report will detail the client’s payment history. You may decide to review your client’s commercial credit report before extending Net 30 to them to avoid losses. Most commercial credit reports, in addition to detailing the payment history of the client, will also provide you with a credit score and a credit recommendation.
If your client runs a smaller business that doesn’t appear in either Dunn and Bradstreet or Smart Business Reports, you may want to instead request that they submit a credit application, along with references. You can then use the provided references to check on the client’s payment history before extending Net 30 to them.
Do you need to offer Net 30 to remain competitive in the industry?
Perhaps. Although most suppliers view Net 30 as inconvenient, it can give you some leverage with larger companies. In fact, some larger companies and government clients demand Net 30 terms from their suppliers, so it is important to consider offering Net 30 terms to your clients to maintain a competitive edge against others in the industry.
Offering a line of credit to your clients may provide you with the tool necessary to land important contracts, which of course, ultimately help your business grow.
What are the risks of offering Net 30?
Providing a line of credit to all your clients can risk your company’s cash position at any time. In addition, offering Net 30 terms to difficult clients can leave you with debt, thereby affecting your company’s growth. It is because of this that you need to extend Net 30 terms to only those clients who have displayed their credit worthiness.
