What Is A Net 30 Account
A net 30 account is a line of credit that vendors extend to their customers. A form of trade credit, net 30 accounts allow customers to pay up to 30 days after the invoice date. This guide examines what is a net 30 account for a business, the pros and cons of net 30 accounts, how to open a net 30 account and how it all fits your business’s needs.
What are net 30 accounts for businesses?
Net 30 accounts, sometimes called vendor tradelines, are short-duration lines of credit that some vendors extend to their customers. These accounts provide customers with 30 days from the invoice date to pay for the goods received or services provided. Net 30 account vendors don't charge interest or penalties unless the customer waits more than 30 days to pay their invoice.
In addition to having benefits for buyers, net 30 accounts also offer distinct advantages to sellers. For example, while buyers get 30 days to pay their bill — effectively getting a one-month interest-free loan — vendors are also able to encourage more sales and reduce late payments.
The benefits of net 30 accounts
Buyers benefit from net 30 accounts in several ways. First, business net 30 accounts function as zero-interest loans for the initial 30-day period. A no-interest loan can also help buyers who might not have all the money to pay upon receipt. For example, a retailer might not have the funds to pay for a shipment of toys upfront. However, if they can reasonably assume that they’ll be able to sell enough of the toys within a 30-day window to pay back the invoice, then extending a net 30 line of credit could be a sufficient incentive to place an order.
Additionally, many businesses — particularly those that are unestablished or have bad credit, can use a net 30 account to help build their credit score. Many net 30 vendors will extend credit to businesses other lenders won’t touch. Once you build your credit score using tools like net 30 accounts, you’ll be able to qualify for other types of small business loans.
Vendors benefit from net 30 accounts in two ways. First, net 30 accounts incentivize customers to place more and larger orders because they don’t need to pay right away. Second, the credit-building aspect of using a net 30 account helps vendors attract new customers. So, extending a net 30 line of credit helps vendors build their book of business, and some vendors profit from the service.
The drawbacks of net 30 accounts
In addition to the benefits of net 30 accounts, there are also drawbacks for both customers and vendors. For example, some vendors do a hard credit check before approving a net 30 account, which can negatively impact a business’s credit score.
Vendors offering net 30 accounts may incur opportunity costs due to delayed payments. While 30 days of interest may not seem like a big deal, it can add up over time. Vendors must also maintain sufficient cash flow to continue operations despite late payments. Because of the challenges that late payments can present, many vendors charge clients interest or fees if they fail to settle net 30 accounts in full and on time.
Finally, if a customer fails to satisfy their debt, the vendor is left in the position of having to collect on the account. Sometimes, the vendor may be forced to settle for a lower amount or sell the debt to a collection agency for a fraction of the amount owed.
How do net 30 accounts work?
A net 30 credit account functions as a short-term line of credit that certain vendors extend to their customers. When using net 30 payment terms, a customer has 30 days from receiving their invoice until they must settle their account. No interest is charged on the loan until 30 days have passed.
Many vendors offer net 30 payment terms to incentivize customers to start doing business with them or increase their buying. In some cases, vendors will offer a discount to customers who settle their accounts before 30 days. For example, some vendors offer a 2/10 discount, which means customers will receive a 2% discount if they pay within 10 days.
While net 30 is a widely recognized term, many vendors will choose to lay out the net 30 terms in clear language to avoid misunderstandings. For example, the vendor might write on the invoice “payment due in 30 days from receipt” rather than “net 30.”
Net 30 accounts vs. net 30 vendors
Net 30 vendors are vendors who offer net 30 payment terms to their customers. They know businesses with poor or nonexistent credit will seek them out to build their business and — over time — their credit score. Net 30 accounts, on the other hand, are the payment terms offered to the buyers, which function as a short-term line of credit.
Factors that influence net 30 terms
While net 30 vendors tend to be more lenient in their lending criteria than major banks and other lenders, they still take certain factors into account when deciding whether to extend credit to a buyer. These are three of the top factors that will influence the terms of a net 30 deal.
Payment history on a business credit report
Although many businesses use net 30 accounts to build their credit history, vendors may still check a business’s credit history before extending credit. Businesses with sound credit scores from one of the major business credit bureaus like Dun & Bradstreet have demonstrated a history of paying back their debts in full and on time.
Not all vendors check credit history, and those who do may make soft pulls that won’t negatively impact your credit. However, checking your credit before you apply for net 30 payment terms is a good idea.
Business finances
Before extending your credit, vendors will likely want to know the state of your business’s finances. While debt is a normal part of doing business, vendors view excessive debt levels as a sign that you’ll struggle to pay for your orders. Consequently, they may refuse to extend a net 30 account if you have too much debt or insufficient revenue to cover your debts
Your relationship with the vendor
Relationships between vendors and customers often strengthen with age. Developing a longer relationship and avoiding late payments with a vendor translates to more favorable payment terms. That can mean longer payment windows (e.g. 60 or 90 days instead of 30), lower interest rates and penalties on missed payments, and deeper discounts on early payments. Vendors will also be more likely to forgive late payments if you have a history of making on-time payments.
How to get a net 30 account
If you want to set up a net 30 account, the first thing you’ll need to do is identify a vendor who offers those terms. Once you’ve chosen a vendor to work with who offers net 30 accounts, you’ll need to apply to do business with them on those payment terms.
Vendors have different qualifying criteria for buyers who want to open a net 30 account. When setting up a net 30 account, you’ll need to provide cursory information about your business, so the vendor can decide whether to approve you. For example, you may need to show that you started a business at least one to three months before in order to satisfy a minimum age requirement. You may also need to provide an Employer Identification Number (EIN) or demonstrate that you operate in the U.S.
Invoice factoring as an alternative to net 30 accounts
If a net 30 account isn’t an option for your small business, you may consider invoice factoring as an alternative. Invoice factoring is a method for getting cash quickly by selling unpaid invoices at a discount. If your business routinely provides goods or services to clients and sends invoices for those goods or services, you can sell those invoices to a factoring company for a percentage of the total amount owed (often up to 95% of that amount).
For example, let’s say you’re a manufacturer with a $5,000 invoice that’s due by a client within 30 days. However, you have to pay for industrial supplies in three days and are short on cash to fund the purchase. You can sell your invoice to an invoice factoring company, which will take a 3% nonrecoverable fee of $150. An additional 12%, or $600, will be held until the client pays off the invoice. The factoring company will then pay you the remaining $4,250 as an advance on the customer’s invoice.
Invoice factoring differs from conventional lending in several ways. First, you’re able to sell the unpaid invoice instead of borrowing money using the invoice as collateral. Rather than borrowing from a lender you have to pay back later, they can pass on the responsibility of repayment to a third party (your customer) in exchange for ready cash.
Upsides to using invoice factoring include:
- Immediate payment
- Insulation against missing or late payments
- Not having to follow up on late payments
- Not having to take legal action against clients with delinquent payments
Downsides include:
- Factor fees
- Additional financial penalties for actions outside of their control
How do net 30 accounts compare to business loans and credit cards?
The only similarity between net 30 accounts, business loans and credit cards is that all three offer businesses credit and charge interest on late payments. Net 30 accounts and business loans are both fixed lines of credit, meaning that they must be repaid according to a predefined schedule.
Net 30 accounts tend to have shorter timelines than business loans. However, unlike traditional business loans, net 30 account holders only pay interest if they make late payments.
Credit cards are a type of revolving line of credit. Using a business credit card, you can borrow to finance purchases up to a predetermined borrowing threshold (your credit limit). Additionally, many credit card companies offer incentives for using their cards, such as cashback and mileage rewards. By contrast, net 30 providers may offer modest discounts for early payments but generally do not offer rewards simply for using their payment terms.
Do net 30 accounts report to business credit bureaus?
Some vendors that offer net 30 accounts report their accounts to credit bureaus. However, others only report past-due accounts. So, while you may open a net 30 accounts to help build your business credit scores, any missing or late payments may negatively impact your business’s credit score.
Deciding if a net 30 account is what your business needs
If your business is new, lacks credit or relies on monthly revenue in order to cover the cost of goods or services purchased throughout the month, a net 30 account may be an ideal option to finance your small business. Opening a net 30 account can help you extend the time you have to pay outstanding invoices and also potentially help you build your business’s credit.
Because a higher business credit score can shave thousands of dollars or more of interest payments on business loans and help you get approved for business credit cards and other financial tools, opening a net 30 account can be a cash-positive decision for many businesses. If you lack the credit history required to use other types of business financing and want to take advantage of the short-term interest-free financing included in net 30 payment terms, consider speaking with vendors to open an account for your small business.