Net 45 Payment Terms: Meaning, Calculation & Example

What Does Net 45 Mean & Why Does it Matter?

A net 45 payment means your customer must pay the payment within 45 days of the invoice date. It is a common payment term used in many industries, especially in B2B.

Net 45 payment terms are valuable because they directly link with the customer relationship. When you offer 45 days, which is an extended payment term compared to Net 15 or Net 30, it actually builds trust.

Also, these terms are useful for long-term deals involving large amounts. It is because the individual client gets enough time to make the payment. Net 45 payment terms directly impact the cash flow management and the billing cycle. The main reason is that it delays payment compared to net 15 or net 30 because it covers a longer period.

You can improve your invoicing accuracy and payment tracking by understanding the net 45 meaning. Hence, you’d better control your outstanding invoices and cash flow.

How to Calculate Net 45?

Calculating net 45 payment is quite straightforward and based on simple mathematical concepts. You need to follow the three steps:

1. Determining the invoice date: The date on which the invoice is released/issued is its invoice date. You need to count down 45 days from it.

2. Adding 45 days: Add 45 days to the invoice date and calculate the resulting date.

3. Find out the due date: It’s 45 days after the invoice date. In some cases, weekends and holidays may or may not be included, depending on the contract terms.

Let’s understand the calculation from one example. Suppose you issue an invoice on 1st February with net 45 payment terms.

Now we need to find its due date, accounting for 45 days.

Since February has 28 days, the total number of days will be 27 in this case, since we are excluding the invoice issue date.

45 – 27 = 18

So, the due date is 18th March.

In some cases, weekends and holidays might affect the invoice payment terms. Also, in some cases, there may be an extended due date; you must highlight this.

What Are the Common Examples of 45 Payment Terms?

There are slight variations in the net 45 payment terms under which discounts are offered to encourage early payment. The application of these early payment discounts varies from business to business. Some of them are as follows:

• Net 45 – No early payment discount applies; clients must pay in full within 45 days.
• 1/7 Net 45 terms – 1% of discount is applicable if the client makes the payment within 7 days. Otherwise, full payment will be applicable.
• 1/10 Net 45 terms – 1% of discount is applicable if the client makes the payment within 10 days. Otherwise, full payment will be applicable.
• 1/15 Net 45 terms – 1% of discount is applicable if the client makes the payment within 15 days. Otherwise, full payment will be applicable.
• 2/10 Net 45 terms – 2% of discount is applicable if the client makes the payment within 10 days. Otherwise, full payment will be applicable.

Let’s understand the above variations with the example below:

Suppose you issue an invoice for $1,000 with a due date of 20th April. On the basis of the above variations, the calculation will be as follows:

For 1/7 Net 45 terms

Your customer will receive a 1% discount if they pay within 7 days.

The payment amount will be as follows:

1000 – (0.01 x 1000)
990

So, the customer needs to pay $990 if they pay the invoice within 7 days. Otherwise, a $1,000 payment will be required.

For 1/10 Net 45 terms

For this, the calculated discount amount is $990 if payment is made within 10 days. If not, then full payment of $1,000 will be applicable.

For 1/15 Net 45 terms

For this, the calculated discount amount is $990 if payment is made within 15 days. If not, then full payment of $1,000 will be applicable.

For 2/10 Net 45 terms

Your customer will receive a 2% discount if they pay within 10 days.

The payment amount will be as follows:

1000 – (0.02 x 1000)
980

So, the customer needs to pay $980 if they pay the invoice within 10 days. Otherwise, full payment of $1,000 will be required.

What Are the Pros and Cons of Net 45 Payment Terms?

Net 45 payment terms offer various advantages and disadvantages to both buyers and sellers.

Pro

Leads to Strong Client Relationships

Unlike net 15 and net 30 payment terms, net 45 terms offer a longer payment period. This approach builds client trust and directly impacts the business-client relationship. Also, it increases the chances of repeat business.

Attract Larger Clients

It is highly beneficial to use these invoice payment terms when you work with enterprise-level clients. These clients often prefer more time to make payment, which is possible with net-45 payment terms.

Good for Larger Projects

Net 45 payment terms are always suitable for large-scale projects involving large sums of money. It’s because, in such cases, the client needs enough time to make the payment, and 45 days is sufficient.

Cons

Not Good for Small Businesses

Small businesses mostly rely on the steady cash flow to cover their expenses. Because of net-45 terms, there can be a cash gap that makes it hard for these businesses to cover expenses.

Cash Flow Delay

The client is given 45 days to make payment, which is much longer than the terms offered by net 15 or net 30. This can affect cash flow, slowing it down compared to other shorter invoice payment terms. As a result, businesses rely on lines of credit to cover their expenses.

Increase the Bad Debt Risk

The longer credit period increases the risk of bad debt due to payment delays. There is also a higher chance that the client may forget to make the payment. The customer’s financial situation can also have a significant impact.

How to Include Net 45 Payment Terms on Your Invoice?

Including net 45 payment terms is not rocket science. However, you need to take care of a few things.

Always explains the payment terms in one complete sentence. You can mention, ‘Payment is due within 45 calendar days from the invoice date.’ It leads to a clear understanding and eliminates the risk of confusion.

Also, mention the terms separately in the payment terms section. You can highlight the crucial terms to gain the client’s attention.

Clearly state whether the 45-day period starts from the invoice date. There are some exceptional cases, and the days can be counted from the delivery date, the project completion date, or the end of the month.

Instead of using deep accounting jargon, it is always better to use simple, professional language. This helps the team and clients to grasp and understand things easily.

What Are the Alternatives to Net 45 Payment Terms?

There are a few alternatives to net 45 payment terms, explained below:

Due on Receipt

Due on receipt means payment is due immediately upon receipt of an invoice. It is useful when you handle a small business or work as a freelancer. It is also useful when invoicing a new client.

Net 10 Payment Terms

It is the shortest payment term. Clients need to make the payment within 10 days from the invoice date. Like due-on-receipt terms, these terms are also useful for small businesses where quick cash flow matters.

Net 15 Payment Terms

Clients need to make the payment within 15 days from the invoice date. Small businesses and service-based industries use such terms.

Net 30 Payment Terms

Clients must pay within 30 days of the invoice date. These terms are mainly useful for B2B businesses, service providers, and contractors.

Net 60 Payment Terms

According to net 60 payment terms, clients must pay within 60 days of the invoice date. Large-scale payments and large corporations use these terms.

Net 90 Payment Terms

Under net 90 payment terms, clients must pay within 90 days of the invoice date. These terms are ideal for large companies, multinational corporations, and public-sector contracts.

45 Days End of Month (45 EOM)

In this term, you need to count 45 days from the end of the invoice month, rather than the invoice date. For instance, if the invoice date is 10th March, then considering 31st March and adding 45 days, the payment due date will be 15th May.

Cash On Delivery (COD)

Under this term, the client pays upon delivery of the goods. The carrier or UPS collects payment once they hand the product over to the customer. E-commerce and logistics services usually use this to receive payment immediately and maintain their cash flow.

How to Manage Net 45 Payment Efficiently?

Just mentioning the net 45 payment terms is not enough. You need to manage it efficiently with the following terms:

Mention the Details Clearly

Always focus on the clarity of the details. Keep the language as simple as possible so your customer can understand the concept quickly. It also prevents confusion. You can also highlight key points to capture viewers’ attention.

Offer Multiple Payment Options

Always offer multiple payment options to your customers. This approach eases payment processing for customers and helps you collect payments effectively. Additionally, it improves your business’s cash flow, as clients no longer need to rely on a single payment method.

Charge Late Payment Fees

Assess late payment fees if the customer fails to pay after 45 days. Make sure the charges are fair and comply with local, state, and market pricing standards. Charging such fees helps improve cash flow, enhance liquidity, and compensate for lost opportunities.

Track Every Invoice Carefully

Invoice tracking is crucial to maintaining active billing. Track invoices by invoice date, due date, and payment status. You can use a simple spreadsheet if you handle a small business. However, large businesses need accounting software to track invoices digitally.

Offer Early Payment Discount

Attract clients with an early-payment discount to boost on-time payments. This approach encourages customers to make payments sooner in exchange for the small savings. However, you need to mention and explain it on the invoice clearly.

Utilize Software

Invoicing software like Moon Invoice offers a cloud-based platform for better invoice management. You can ease everything from invoice creation to sending it. It’s quite straightforward to create the digital invoice using the 66+ customized, ready-made samples. Also, it is easy to set up an automated payment reminder for the invoice, reducing manual effort and saving time.

The platform offers multiple payment options, and you can easily set one. You can track invoice status in real time as paid, pending, or overdue. Additionally, it is easy to set up a recurring invoice for the ongoing services.

Wrapping Up

Net 45 payment terms are crucial because they keep your business’s cash flow active. Although these terms include a lengthy payment period, they are still ideal for businesses. You can manage these terms wisely and ensure on-time payment by incorporating automation, effective follow-up, and clear communication. However, it is only possible when you choose the right invoicing software.

FAQs on Net 45 Payment Terms