What Is Net 20 and How Does It Affect Your Business?

“Net 20” is a common payment term in business, defining when payment for goods or services is due. Clear payment terms help businesses maintain predictable cash flow and set expectations, reducing disputes.

Understanding Net 20

The term “Net 20” means the total invoice amount is due within 20 calendar days from the invoice date. “Net” indicates the full amount owed after any discounts or credits. The “20” refers to the number of days allowed for payment. This 20-day period typically begins on the invoice issue date, not necessarily when goods are received or services rendered.

For sellers, “Net 20” terms extend a short-term line of credit, allowing buyers time to receive and process goods or services before payment. From the buyer’s perspective, these terms provide a brief window to manage cash flow and ensure funds are available by the due date.

Practical Business Implications

Using Net 20 terms carries distinct implications for both the business extending credit and the business receiving it. For the seller, Net 20 impacts accounts receivable, which represents money owed by customers for goods or services delivered on credit. Effective management of receivables is important for healthy cash flow, as delayed payments can constrain a business’s ability to meet its own financial obligations. Sellers must implement robust collection processes to follow up on outstanding invoices and ensure timely receipt of funds.

For the buyer, Net 20 terms directly influence accounts payable, which are short-term debts owed to suppliers. Careful cash flow planning is necessary to ensure funds are available to settle invoices by the 20-day deadline. Consistently paying on time helps a buyer maintain a positive credit standing with vendors, fostering strong business relationships and potentially enabling more favorable terms in the future. Conversely, late payments can lead to penalties, damaged vendor relations, and a negative impact on a business’s creditworthiness.

Other Standard Payment Terms

Beyond Net 20, businesses utilize various other standard payment terms to suit different transaction needs and industry practices. “Net 30” and “Net 60” are common, meaning payment is due within 30 or 60 days from the invoice date, respectively. These extended terms offer more flexibility to the buyer but also mean a longer wait for payment for the seller.

Other terms include “Due on Receipt,” which demands immediate payment upon invoice delivery, or “Cash on Delivery (COD),” where payment is required when goods are physically delivered. “Payment in Advance (PIA)” or “Cash in Advance (CIA)” terms require payment before any goods or services are provided. Businesses may also offer “2/10 Net 30” terms, providing a 2% discount if the invoice is paid within 10 days, otherwise the full amount is due in 30 days.