5 min read
Key takeaways
- Net terms set the time frame vendors give buyers to pay invoices after receiving goods or services. They typically reflect industry norms, liquidity needs and the balance of negotiating power between buyer and supplier.
- Invoice payment terms affect both parties’ working capital. Longer terms let buyers hold cash longer but may strain the supplier’s cash flow.
- Buyers can often negotiate valuable early payment discounts, but inefficient accounts payable processes make those deadlines hard to meet. AP automation helps companies capture these discounts consistently.
The net terms on invoices your company receives aren’t just payment deadlines—they directly impact your working capital and vendor relationships.
Paul Kizirian, Executive Director for Treasury Consulting at J.P. Morgan, explains how invoice payment terms work, why accounts payable (AP) automation is key to capturing early payment discounts and shares strategies for optimizing working capital while meeting terms.
Net terms: What is net 30?
Net terms represent the payment timeline within trade credit agreements between vendors and buyers.
They’re commonly expressed as net 30, net 60 or net 90, and give buyers 30, 60 or 90 days, respectively, to submit payment for the net—or full—amount invoiced.
While net 30 is a particularly common invoice payment term, vendors and buyers tailor terms to their operational and cash flow needs.
A vendor that wants to incentivize faster payment may offer an early payment discount. For example, 2/10 net 30 means the buyer receives a 2% discount if they pay within 10 days. Otherwise, the full amount is due in 30 days. The buyer can’t claim the discount if they are slow to process invoices and cannot pay within the 10-day time frame.
Why net terms matter
Invoice payment terms influence working capital and supplier relationship management.
Shifting from net 30 to net 60 lets buyers hold cash twice as long, extending Days Payable Outstanding (DPO), which provides a direct working capital benefit. But it has the opposite effect on vendors by delaying their receivables, extending their Days Sales Outstanding (DSO). Vendors prefer to minimize DSO within their accounts receivable.
Negotiating terms should include discussing early payment discounts as a strategy that helps buyers and vendors balance their working capital needs.
“If the buyer can consistently capture discounts, the bottom-line savings can be significant. Terms are very important yet often overlooked,” Kizirian said.
How businesses set invoice payment terms
Key factors that influence businesses’ terms include:
- Negotiating power: “Terms are largely driven by who has the trade leverage,” Kizirian said. Scale matters, but so does the product or service. A vendor selling an item that’s unique or critical to the buyer’s business holds more power than one selling a non-essential commodity.
- Industry: Many businesses stick to widely accepted invoice payment terms, but industry norms vary. Net 30 is a common standard, but that can vary by business sector. In the petroleum industry, for example, invoices often must be paid within one or two days, Kizirian said.
- Liquidity: Buyers with limited liquidity tend to seek longer net terms and forgo early payment discounts to keep cash available longer.
- Interest rates: Buyers may push for longer terms when interest rates are high. “While most businesses will gain more by capturing a discount, in times of uncertainty many still choose to hold the cash as a cushion,” Kizirian said.
- AP efficiency: A buyer with inefficient systems for approving and processing invoices may struggle to adhere to tight terms or capture early payment discounts. They have no metrics to identify how much their process costs in missed opportunity. An important but often overlooked metric is identifying where inefficiencies or “leaks” in the process are causing missed discounts, duplicate payments or unnecessary manual work.
Optimizing working capital while meeting net terms
Several strategies can help companies optimize working capital while adhering to invoice payment terms:
Using AP automation to access discounts
Many businesses using manual accounts payable processes struggle to consistently meet net terms deadlines, much less take advantage of early payment discounts.
“The biggest portion of the payments timeline is legitimizing invoices,” Kizirian said. “Did we order this, is it the right amount, is the cost charged correct and did we receive it?”
AP automation streamlines that process by extracting invoice data, matching it to purchase order data and sending it to the person who can confirm the items or services were received. Compared with manually entering and cross-referencing data, AP automation software can help businesses save time and accurately spot billing errors.
While the median organization pays 96% of invoices on time, only about 15% of invoices are paid within the discount period, according to the American Productivity and Quality Center. This highlights that even with strong on-time performance, many companies still miss out on early payment discounts. Top performers, often leveraging automation, are able to capture more discounts and further reduce missed opportunities.
“If a company can use AP automation to approve invoices fast enough to capture more early payment discounts, the ROI can be tremendous,” Kizirian said.
Future-dating ACH payments
One of the easiest ways to improve working capital is making vendor payments as close to the net terms deadline as possible. Future-dating ACH payments lets businesses schedule transactions for a specific date, rather than having payments processed immediately.
“Even if it only extends the business’s access to cash by one day, if it’s done across the board, those incremental improvements to working capital add up,” Kizirian said. “It’s kind of a no-brainer.”
Virtual card payments
When vendors don’t offer early payment discounts, consider paying with a virtual card. Card payments let buyers pay vendors immediately while extending their own cash flow until the card statement is due—typically 15 to 30 days later. Buyers may also earn rebates on card spending.
While early payment discounts and card payments can both strengthen working capital, buyers usually can’t combine the benefits. Vendors will not offer discounts when buyers pay by card due to card processing fees.
“Part of vendor management is choosing the best approach for each vendor,” Kizirian said. “We offer a vendor analysis that can help companies figure that out.”
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JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/commercial-banking/legal-disclaimer for disclosures and disclaimers related to this content.
