What Does Net 90 Mean for Your Business?
Learn how a specific extended payment term impacts business cash flow and financial strategy for both buyers and sellers.
Net 90 is a standard payment term indicating that the full amount of an invoice is due 90 calendar days from its issue date. It is common in business-to-business (B2B) transactions, particularly with suppliers and vendors. It establishes a clear timeframe for when a payment obligation must be fulfilled. This term helps structure financial agreements between entities, providing a defined period for payment processing.
Understanding the “Net” and the “90”
The term “Net” in Net 90 signifies that the total, undisputed amount of the invoice is expected without any deductions. This means the agreed-upon price for goods or services is the exact figure to be paid by the due date. Unlike some other payment terms, Net 90 does not inherently include provisions for early payment discounts.
The “90” refers to 90 calendar days, not business days. This period typically begins counting from the date the invoice is issued. For example, if an invoice is dated August 1st, payment would be due on October 30th. This established timeframe provides both the buyer and seller with a predictable schedule for financial settlement.
The inclusion of “Net 90” on an invoice serves as a direct instruction regarding the payment deadline. It communicates the credit period extended by the seller to the buyer. This clarity helps businesses manage their accounts payable and receivable, ensuring both parties understand their responsibilities. Adhering to this term is a fundamental aspect of maintaining healthy business relationships and credit standing.
Common Payment Terms Explained
Net 90 exists within a spectrum of common payment terms that businesses utilize to manage their financial transactions. For instance, “Net 30” and “Net 60” are widely used, meaning the full invoice amount is due in 30 or 60 calendar days, respectively. These shorter terms are often seen in industries with faster inventory turnover or for smaller transaction values.
Another common term is “Due Upon Receipt,” which signifies that payment is expected immediately upon the buyer receiving the invoice. This term offers no extended credit period and is typically reserved for new clients, smaller transactions, or services rendered on a cash-on-delivery basis.
Some payment terms also offer incentives for prompt payment, such as “2/10 Net 30.” This means a 2% discount is available if the invoice is paid within 10 days, otherwise the full amount is due in 30 days. All these terms are integral components of the agreed-upon credit arrangement between a buyer and a seller, forming the basis of their commercial relationship.
Business Application of Net 90
From a seller’s perspective, offering Net 90 terms can be a strategic decision to attract and retain certain types of clients. Large corporate clients, for example, often have lengthy internal approval processes or require extended payment cycles for significant project-based work. Providing a 90-day window can accommodate these operational realities, effectively acting as a form of trade credit that facilitates larger or more complex transactions.
For the buyer, Net 90 terms provide a substantial advantage in managing cash flow. It allows a business to receive goods or services and potentially generate revenue from them before the payment becomes due. For example, a retailer might sell inventory purchased on Net 90 terms before needing to pay their supplier. This aligns payment obligations with actual cash generation.
Net 90 terms are commonly found in industries characterized by large-scale operations, extended project timelines, or complex supply chains. This includes sectors such as large-scale manufacturing, significant construction projects, and certain international trade arrangements. The extended payment window supports the substantial capital outlays and lengthy production or delivery schedules inherent in these areas. Ultimately, these payment terms are typically negotiated and explicitly agreed upon as part of the sales contract or purchasing agreement, reflecting a mutual understanding of the financial commitment involved.