What Does Net 90 Payment Terms Mean?

Payment terms define how and when a company receives payment for its goods or services. They are a foundational part of any business agreement, specified in contracts, purchase orders, or invoices, and are crucial for setting clear expectations and managing financial flows. These terms directly influence a company’s cash flow cycle, impacting when accounts receivable come in and accounts payable go out. Effective management of payment terms is essential for operational liquidity and overall financial health.

Understanding Net 90 Payment Terms

“Net 90” payment terms indicate the full invoice amount is due within 90 days from a specified date, usually the invoice date. The “Net” signifies the total amount owed, typically without any standard discount unless explicitly stated otherwise. This extended period provides the buyer with time to manage cash flow and review the goods or services received.

To calculate the due date for a Net 90 invoice, add 90 calendar days to the invoice date. For example, an invoice dated January 1 with Net 90 terms would be due on April 1. While the invoice date is the common starting point, some agreements might specify the clock begins upon delivery of goods or services. Clarify the exact triggering event for the payment period.

Financial Implications of Net 90

For the buyer, Net 90 terms provide a longer period to retain cash, improving working capital and liquidity. This extended credit allows buyers to generate revenue from purchased goods or services before payment is due. They typically incur no interest if the bill is paid within 90 days. This flexibility benefits businesses with cyclical revenue or large projects.

Conversely, for the seller, Net 90 terms delay revenue inflow, straining cash flow and operational liquidity. Waiting up to three months for payment means cash is tied up in accounts receivable, affecting the seller’s ability to cover operating expenses, payroll, or invest in growth. This delay necessitates careful financial planning and forecasting to ensure the business can meet its financial obligations while awaiting payment. The longer the payment term, the greater the risk of late payment or non-payment for the seller.

Common Variations and Related Terms

Beyond Net 90, businesses commonly encounter other net payment terms, such as “Net 30” and “Net 60.” Net 30 means payment is due within 30 days of the invoice date, while Net 60 allows for a 60-day payment period. These variations provide different levels of flexibility, with Net 30 being a common standard and Net 60 often used for larger purchases or longer projects.

Many net terms also include provisions for early payment discounts, designed to incentivize quicker payment from the buyer. A common example is “2/10 Net 90,” which offers a 2% discount if the buyer pays the invoice within 10 days. If the buyer does not take advantage of this discount, the full invoice amount is due within the standard 90-day period. This approach encourages prompt payment while still providing the option of extended terms.