Net 60
Net 60 payment terms give buyers 60 days to pay invoices in full. Learn how they work, their pros and cons, and alternatives like Net 30 and Net 90.
Overview
Net 60 is a payment term that gives buyers 60 days to pay their invoices in full. This extended payment window can significantly impact cash flow and customer relationships.
How Net 60 Works
When a seller applies Net 60 to an invoice, the deadline for paying it is 60 calendar days after the customer receives it. The payment period typically begins on the invoice date, but it can also start on the receipt of goods or services date if specified.
Common Variations
- Standard Net 60: Full payment is due within 60 days.
- 1/10 Net 60: A 1% discount if paid within 10 days; otherwise, full payment is due in 60 days.
- 2/10 Net 60: A 2% discount if paid within 10 days; otherwise, full payment is due in 60 days.
Pros and Cons of Net 60
For Buyers
Pros:
- Cash Flow Flexibility: Buyers can manage their finances without immediate payment pressure.
- Early Payment Discounts: Opportunity to save money by paying early.
- Improved Supplier Relationships: Builds trust and goodwill with suppliers.
Cons:
- Potential for Late Payments: Risk of damaging credit score or facing collection actions.
For Sellers
Pros:
- Competitive Advantage: Attracts more customers.
- Customer Loyalty: Encourages repeat business and long-term relationships.
Cons:
- Cash Flow Challenges: Delays in receiving payment can strain finances.
- Risk of Bad Debt: Potential for non-payment.
Net 60 Examples
Standard Net 60
A retailer orders $10,000 of inventory from a wholesaler with Net 60 terms. The invoice date is May 1, so payment is due by June 30.
1/10 Net 60
Same scenario, but with 1/10 Net 60 terms. If the retailer pays by May 10, they receive a 1% discount ($100). If not, they owe the full $10,000 by June 30.
2/10 Net 60
Similar to 1/10 Net 60 but offers a 2% discount ($200) if paid within 10 days.
Wholesale Net 60
A manufacturer sells $50,000 of goods to a distributor with Net 60 terms. The distributor can sell the goods before paying the invoice.
Net 60 vs. Other Payment Terms
- Net 30: Shorter payment period, better for sellers needing faster payments.
- Net 90: Longer payment period, more flexibility for buyers but higher risk for sellers.
Managing Net 60
- Clear Communication: Specify start date (invoice date or delivery date).
- Early Payment Incentives: Offer discounts to encourage quicker payments.
- Late Payment Penalties: Charge interest or late fees for overdue invoices.
- Invoice Factoring: Sell unpaid invoices to a third party for immediate cash.
Alternatives to Net 60
- Net 30: Payment due within 30 days.
- Net 45: Payment due within 45 days.
- Net 90: Payment due within 90 days.
- Payment in Advance (PIA): Requires payment before delivery.
- End of Month (EOM): Payment due at the end of the month.
- Due Upon Receipt: Immediate payment required.
Key Takeaways
- Clarity is Crucial: Clearly communicate payment terms to avoid misunderstandings.
- Consider Cash Flow: Evaluate the impact on cash flow before offering Net 60.
- Credit Risk: Assess the buyer's creditworthiness before extending long payment terms.
- Documentation: Include payment terms in contracts and on invoices.