What is Net 45?

by | Apr 9, 2024 | 0 comments

Are you a growing business looking to revamp your payment terms? How about a new business trying to navigate invoicing customers for the first time? Wherever you’re at on the business experience spectrum, it’s important to understand the basic terms you’ll come across, one of which is Net 45.

In this article, we’ll explore the ins and outs of Net 45, from its definition and calculation to understanding its general payment terms and weighing the pros and cons.  

What is Net 45?

Net 45 refers to the time frame within which an invoice must be settled. When labelled as Net 45, it signifies that payment is expected within 45 days.           

Some businesses may incorporate additional terms within Net 45. For instance, “1/10 Net 45” denotes that a 10% discount is available if payment is made within 10 days. Otherwise, the full invoice amount is due within the standard 45-day period. We’ll delve into a specific example in greater detail in subsequent sections.  

When Does Net 45 Start?

Each business might adopt a slightly different approach to Net 45. For some, Net 45 starts counting from the day the invoice is received.

In such cases, considering invoice delivery times is essential to avoid penalising customers for payments made within the acceptable time frame. For example, if you mail your client an invoice with Net 45 payment terms, allow 3-4 business days for the invoice to be delivered. This means if you send an invoice out on January 1st, a payment within the timeframe could arrive by February 17th     

Another method is to start Net 45 on the day the invoice is issued. This means that the time clock starts on the day the invoice is generated and sent to customers. Nowadays, thanks to electronic invoicing, invoices are generally issued and received almost instantly. Regardless of the method chosen, consistency and clear definition are vital!

Does Net 45 Include Weekends and Holidays?

Yes, Net 45 payment terms do include weekends and holidays.

How to Calculate Net 45 Payment Terms

Your internal invoice processes dictate how to calculate Net 45 payment terms. Begin by deciding whether Net 45 starts from the invoice issuance date or the customer’s receipt date. To avoid confusion among all parties involved, clearly state the due date on the invoice. For instance, your invoice could state “Net 45 – Due on 1st March, 2005,” indicating to customers that payment is due within 45 days and providing a specific deadline. 

Moreover, since it can be difficult to track when to start the Net 45 calculation, many businesses are transitioning to electronic invoicing. This approach not only allows you to monitor when customers access the invoice but also establishes a clear starting point for tracking Net 45.

Incentives vs Penalties in Payment Terms    

Businesses have the flexibility to choose whether to incorporate incentives, penalties, both, or neither, into their payment terms.

Incentives, such as Early Payment Discounts, encourage prompt settlement of invoices by offering a discount for early payment. This practice enhances cash flow, diminishes the necessity for debt collection efforts, and fosters positive customer relationships.

Penalties, such as Late Payment Fees (flat fees) or Interest Charges (typically ranging from 1% to 5%), discourage late payments by imposing additional costs on overdue balances. These penalties incentivise customers to meet payment deadlines, thereby mitigating adverse effects on cash flow and reducing the need for subsequent collection efforts.

Net 45 Payment Terms Example   

Let’s go through an example of Net 45 payment terms. Let’s say you prioritise cash flow and are willing to incentivise customers with an early payment discount. This discount is 2% off the invoice if paid within 10 days of the invoice date. Your invoice would state, “2/10 Net 45.”

To further clarify you can specify the due date on the invoice. Your invoice states the issue date of January 1st, the discounted due date of January 7th, and the final due date of February 15th.      

Net 45 vs Net 30

Net 45 and Net 30 are rather similar payment terms. The one key difference is that Net 30 requires invoice payment within 30 days of receipt, while Net 45 extends the payment timeframe to 45 days.

What are the Benefits of Using Net 45?

There are a few different benefits of using Net 45, including: 

  • Enhanced customer relationships: Offering Net 45 terms can be seen as a gesture of trust and goodwill towards customers. It demonstrates a willingness to accommodate their payment preferences and may contribute to fostering stronger, long-term relationships. Customers may appreciate the additional time to settle invoices, leading to higher satisfaction and loyalty.
  • Competitive advantage: In industries where Net 45 terms are less common, providing this extended payment option can give your business a competitive edge. It may attract customers who prefer longer payment terms or who are seeking vendors that offer more flexible payment arrangements. By aligning your payment terms with customer needs and market trends, you can differentiate your business and attract a broader customer base.

What are the Cons of Using Net 45?

It’s also important to be aware of the cons associated with using Net 45. These include: 

  • Potential hindrance to cash flow: Customers waiting the full 45 days before making payments can impede the smooth flow of cash within your business operations, especially if there are multiple outstanding invoices.
  • Confusion over payment timing: Without clearly defining when the 45-day period begins, confusion may arise regarding the due date, potentially leading to delays or disputes in payment processing.
  • Elevated risk of default or non-payment: Extending payment terms to 45 days increases the risk of customers defaulting on their obligations or failing to make timely payments, which could strain your finances and require additional resources for debt collection.
  • Increased administrative burden: Managing a longer payment cycle entails more administrative tasks, such as tracking invoices, following up on overdue payments, and reconciling accounts, which can consume valuable time and resources that could be allocated elsewhere in your business.

The Alternative of Net 45

There are alternatives to Net 45, such as Net 10, Net 15, Net 30, Net 60, and Net 90. The industry you operate in and your business’s needs will dictate which type of due date works best. We’ll delve deeper into these topics in our upcoming series and blog posts. Stay tuned for more insights!

Should You Use Net 45 Payment Terms?

Ultimately, whether to go with Net 45 payment terms boils down to what works best for your business. Take a moment to consider if a 45-day payment period aligns with what’s typical in your industry and if it supports your cash flow needs.

Remember, there’s no one-size-fits-all solution. It’s all about finding what fits your company’s financial rhythm and the needs of everyone involved in the transaction.

If your small business is often juggling cash flow, you might lean towards shorter terms, such as Net 30 (or even Net 15). But if you’re swimming in working capital without any cash flow worries, longer terms like Net 45 might suit you just fine.

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