Are you struggling to get paid for your work? You’re not alone. According to recent surveys, many small businesses are facing issues related to slow or non-payment from their clients.
Research shows that companies take an average of 45 days (or more) to receive payment after submitting invoices. This is known as “net 45” payment terms. It can be frustrating and disruptive to their cash flow. But what causes this problem, and how can we resolve it to ensure timely payment?
Let’s explore some insights on this topic, provide resources for addressing delayed invoice payment, and understand the basic invoice terms in detail using an online invoicing system.
What is a Net 45 Payment Term?
A net 45 payment refers to the time a company has to submit its payment for goods or services rendered, due upon receipt. It is one of the common payment terms.
When it comes to invoice payment, such invoice payment terms matter a lot. It is the required payment time available to the customer to complete the payment from the invoice date.
In other words, it’s the maximum number of days allowed between when an order was placed and when payment must arrive. For instance, if a customer orders products online and delivery occurs within two weeks, they have up to another four weeks to settle the bill without incurring any extra fees on the invoice total.
Hence, a net 45 payment term means the buyer receives 45 additional days past the standard Net Terms before starting to accumulate interest on their purchase balance.
To receive timely payments, as a business, you must write effective invoice terms that include relevant details, especially the due dates.
When Does Net 45 Start?
When considering a net 45-day payment plan, understanding when the timing begins is crucial in terms of calendar days. Each agreement between sellers and purchasers may differ based on specific circumstances involved in the transaction.
Generally, the start of the net 45-day period commences either when the product reaches the intended location or when all obligations associated with deliverables are satisfied and the client receives the invoice. As soon as the specified deadline expires, any unpaid amounts will incur interest charges until they are fully resolved.
It is not new in the market and hence is considered a common invoice payment term (similar to Net 30, Net 60, etc.)
Providers benefit greatly from confirming these effective invoice payment terms with their buyers in writing, since it helps prevent potential disputes regarding outstanding balances further down the line.
Establishing clear expectations and consequences at the outset enables both parties to approach their roles with confidence. They collaborate effectively throughout their dealings.
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How To Calculate Net 45 Terms?
Calculating net 45 terms requires careful consideration of several factors, such as your company’s credit policies, typical sales cycle, and the project’s expected duration. First, determine whether the net 45 calculation includes shipping times.
Then, add the calculated lead time to your desired payment due date to determine the final due date for the invoice. Finally, calculate the total payment due, including taxes and any applicable discounts.
You can search for net 45 calculator online too!
Ensure you clearly communicate payment terms to your client to avoid any misunderstandings about payment schedules. Always review your accounts receivable regularly to ensure prompt payment of outstanding debts.
Net 45 Payment Terms Examples
Below are some examples of how companies use net 45 terms effectively and manage risk and smooth out the accounts payable process:
| Net 45 | The invoice is due in full within 45 days with no early payment discount offered. |
| 2/10 net 45 terms | A 2% discount is available if payment is made within 10 days; otherwise, full payment of the invoice is due within 45 days. |
| 1/15 net 45 terms | A 1% discount is available if payment is made within 15 days; otherwise, full payment of the invoice is due within 45 days. |
| 1/10 net 45 terms | A 1% discount is available if payment is made within 10 days; otherwise, full payment of the invoice is due within 45 days. |
| 1/7 net 45 terms | A 1% discount is available if payment is made within 7 days; otherwise, full payment of the invoice is due within 45 days. |
Importance of Net 45
In today’s competitive business landscape, having flexible and adaptable financial solutions is crucial for sustaining growth and staying ahead of the competition. One such valuable tool is the net 45 payment term, which enables firms to optimize their cash flow while accommodating customer needs without compromising profits.
While this option has gained popularity among B2B transactions, many small to mid-sized organizations struggle with deciding whether to adopt it. Let’s examine why embracing net 45 payment terms can benefit any organization looking to expand its operations.
1. Enhanced Payment Flexibility
Firstly, Net 45 offers enhanced payment flexibility compared to traditional Net 30 or Net 60 plans. Instead of receiving payment within 30 or 60 days, customers have up to 45 days before they owe money to the vendor.
This longer window enables better alignment of resources around larger projects. Additionally, it minimizes strain on liquid assets while improving overall capital efficiency. For example, construction or engineering companies often work on massive infrastructure initiatives that span months or years, where net 45 benefits offer smoother budget planning during prolonged projects.
Similarly, software development groups with extensive customization endeavors enjoy increased operational room to navigate complex tasks while negotiating reasonable payment terms with clients.
2. Tighter Collaboration and Stronger Buyer-Vendor Relationships
Second, net 45 encourages tighter collaboration and stronger buyer-vendor relationships by fostering mutual trust and reliability. Since payments arrive beyond the standard payment range, suppliers must continually demonstrate value creation beyond simple product delivery or basic support levels.
It can incentivize timely payment provided to the customers. Consequently, customers feel valued and connected to the partner, leading to longer associations driven by cooperation and loyalty rather than solely by strict legal agreements or one-time purchase orders.
Ultimately, this improved rapport strengthens the brand reputation and enhances retention rates, as content patrons remain invested in fostering these positive connections, with both parties focusing on developing a win-win relationship. As such, net 45 cultivates enduring partnerships crucial for driving successful business expansion.
3. Helps in Getting Timely Payment & Avoiding Late Payments
An additional benefit of Net 45 revolves around its influence on managing credit risks and avoiding late payments or default scenarios. By granting purchasers more time to settle liabilities, sellers gain insights into shifting financial situations across various industries or economic conditions.
With a deeper understanding of buyers’ evolving circumstances, merchants can refine their credit assessments or institute preventive measures against non-payment hazards, such as setting minimum order thresholds or implementing automatic reorder systems.
These actions enhance protection against invoice payments while maintaining satisfactory DSO figures, which are crucial for securing bank loans or investor confidence.
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Net 45 vs Net 30: Real Differences
| Feature | Net 45 Payment Terms | Net 30 Payment Terms |
|---|---|---|
| Maximum number of days allowed for payment | 45 days after the date of sale | 30 days after the date of the sale |
| Time taken for payment received | Later, compared to a net 30 | Same as net 30 |
| Advantage | Enables efficient management of large projects due to greater leeway in making payments | Less flexibility for larger projects due to shorter payment deadline |
| Disadvantage | Higher likelihood of delayed payments since there is no urgency to make payments | No possibility of delayed payments |
Note: The table provides a concise comparison of key features between Net 45 and Net 30 payment invoice terms.
Pros of Net 45 Payment Terms
Now that you have grasped the concept of Net 45-day payment terms and the key difference between Net 30 and 45, here are some crucial pros and cons of it.
Allows for Greater Flexibility in Managing Cash Flow
With the Net 45 payment term, many businesses are given more time to collect funds from sales, which provides them with greater flexibility in managing their cash flow.
This makes it easier for companies to manage their expenses without worrying about rushing to meet short payment deadlines as they send invoices promptly.
Reduces The Risk of Late Payments and Bad Debts
Net 45 payment terms enable independent freelancers to follow up with their customers as needed, ensuring timely payment and avoiding late fees and penalties.
Having more time means that vendors can reduce the chances of their clients missing payment deadlines and increase the likelihood of receiving full payment for goods sold, thanks to payment reminders.
Encourages Stronger Customer Relationships
Extending Net 45 payment terms demonstrates that you trust your client and believe in building a solid professional relationship. It also demonstrates goodwill towards your customer and creates a sense of reciprocity. Good working relationships help generate repeat business and referrals.
Cons of Net 45 Payment Terms
Not everything about this invoice payment term is in gold – there are some cons and drawbacks you need to keep in mind.
Increases Financial Risk
While Net 45 payment terms allow vendors more time to collect payments from their clients, they also expose them to increased financial risk. If payment isn’t collected at all, then the vendor could find themselves losing out financially.
May Cause Delays in Production Processes
For many businesses, not receiving timely payments can delay the supply chain process, leading to production issues further down the line.
Could Lead to Lower Margins
Delayed payments mean vendors must wait longer to receive payment for their goods, resulting in reduced profits and margin compression even when the customer pays.
The Alternative of Net 45
Credit terms offered to customers can vary. Some alternatives to net 45 terms include:
-
- Due on Receipt: Payment is due immediately upon receipt of goods/services.
- Net 10, Net 15, Net 30, Net 60, Net 90 days payment term: Payment due within 10, 15, 30, 60, or 90 days.
- 45 Days End of Month (45 EOM): Invoice due 45 days after the end of the invoice month.
- COD: Cash/collect on delivery, payment made upon receiving goods for new clients.
- FOB: Invoiced when goods leave the warehouse (FOB Shipping Point) or reach the destination city (FOB Destination), commonly used for international shipments.
Businesses can have a single common discount structure or utilize accounting software to itemize invoices, thereby gaining a competitive advantage over their competitors. Businesses can also use the early payment discount or a special discount scheme for credit card payments.
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Send Invoices and Get Paid Quickly with Moon Invoice
By utilizing Moon Invoice to create professional, automated invoices and reminders, small business owners can streamline their invoice terms, billing process, and account reconciliation, and improve their chances of getting paid quickly.
With a focus on security, simplicity, and affordability, Moon Invoice offers an easy solution for creating customized invoice itemizing tailored to each client’s needs. Whether you prefer the convenience of online invoicing or the personal touch of paper invoices, Moon Invoice has got you covered.
Additionally, by following our tips for successful invoicing and staying organized, you can avoid common mistakes that could slow down the billing cycle and ensure your income flows smoothly.
FAQ on Net 45
Who Uses Net 45 Payments?
Should You Use Net 45 Payment Terms?
What is the 45-day Payment Rule?
How Do Net Payment Terms Work?
Can Small Businesses Offer Net 45 Payment Terms?
How Can I Effectively Manage Net 45 Payments?
Is Net 45 a Legally Binding Payment Term?
What Does 2Net 45 Mean?
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
