Net Terms Explained: How They Impact Cash Flow for Buyers and Sellers

Building strong partnerships with suppliers is one of the top pieces of advice you hear everywhere. 

And that's perfectly fine.

After all, the success of your procurement strategies relies heavily on how reliable and loyal your suppliers are.

But payment terms?

Ah, those are at the heart of any supplier relationship.

Even if you guys are best friends, no relationship can last if payments are constantly delayed. 

The good news? 

You can enjoy flexible payment options while still respecting the contract terms. 

How?

With something called net terms.

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What Are Net Terms?

You've probably seen it in a financial report or heard it mentioned somewhere.

Net 30

Net 20

Net 90

The meaning?

They are payment agreements between a supplier and a customer, in this case, your company, so you have more days to fulfill the pending payment. 

For example, net 30 means that your business is expected to pay the supplier in 30 days; the same logic applies for each term, like net 60 or net 90.

You might also come across EOM (End of Month) terms, where the clock starts ticking at the end of the month when the invoice is issued. So if you get an invoice on July 10 with net 30 EOM, it wouldn’t be due until August 30.

Sounds helpful, right?

Well, bear in mind that depending on your industry, the conditions could change. For manufacturing and related markets, it could be standard to offer longer payment extensions. Something that might not work in fast-moving industries.

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How do Net Terms Work?

Invoice date to due date 

Net terms don't start when you receive the products. They start working based on the invoice date. So, if you get the invoice on December 1 and you and the supplier have agreed for net 30 terms, it means you must pay the bill on December 31.

It’s important to check the fine print, though. 

Some agreements might define when the term starts differently, especially if you’re dealing with international vendors or if there are some interests to be considered.

Early payment discounts

Net terms are only part of the package of benefits suppliers can offer you.  Early payment discounts are usually associated with net terms. Basically,  when suppliers are satisfied working with your company, they give you the possibility of saving some money by giving you a discount if you pay earlier than agreed. 

A typical example is 2/10 Net 30; you get a 2% discount if you pay within 10 days, but otherwise, the full amount is due in 30 days.

Here’s the thing: that discount might seem small, but when you calculate the implied savings, it’s significant. Even more so when buying in bulk.

Managing net terms 

So you've secured net terms from your supplier and now feel relieved with the flexibility. 

Great 

Once you’re on net terms, staying organized is key. Set calendar reminders, integrate with your accounting software, and make sure your AP team knows the due dates. Paying late can damage supplier relationships and might lead to revoked terms.

Worse, it might signal that you aren't reliable to work with.

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Pros and Cons of Net Terms

Theoretically speaking,  net terms are a good idea…

As long as you are actually needing those extensions. 

There could be some situations where the downsides of net terms outweigh the advantages.

Pros

Cash flow 

Net terms work perfectly for businesses if you find that you need additional time to generate revenue before fulfilling your financial obligations. It's ideal if your business needs some manoeuvring space when it comes to finding the balance between profits and responsibilities.

Purchasing power 

Especially if you are relatively new to the market and don't have the reputation of larger companies, you might feel like you can't buy as much as you'd like.

With delayed payment deadlines, you might be able to purchase more inventory or services than if you had to pay upfront.

Strengthened supplier relationships 

Maybe we should have put this one as the first benefit.

If a supplier is offering you things like net terms and early payment discounts, it's a green flag for your relationship as it shows they not only trust your company but also that they're ready to build a long-term relationship with you.

Cons

It can be messy to track…

Without the proper system, that's it.

If you don't work with an efficient record of all your pending payments, keeping track of what's due when can become a headache. So, for the love of everything that's good in this world, do yourself a favor and implement a payment schedule with reminders.

Is still a liability 

You might not have to pay today, but you certainly have to pay at some point, so if you're unsure about your company's capability to face those responsibilities in the near future, agreeing to a net term might not be the greatest idea. 

Overspending risk 

Have you ever gotten a discount code and become excited about all the things you could buy? 

Something similar can happen for your business.

Knowing that you have the flexibility to purchase from suppliers and pay later on can be perilous if you start purchasing more items than what you actually need.

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How Net Terms Impact Liquidity for Buyers and Sellers?

While it's totally normal to think of the benefits of net terms from a business perspective, it's also important to consider the impact they have on suppliers.

Whether you're extending terms or receiving them, they directly influence how much cash you have on hand, and when.

For buyers 

The impact net terms have on your liquidity levels can be significant.  Done right, it gives you space to manage your finances correctly. Maybe you could use those supplies to generate some money before dealing with payments.

Maybe you need those 30 or 60 days to work on an additional project or product. 

Whatever the reason, remember, net terms are still financial obligations to take care of.

For suppliers 

Suppliers, this one is for you

If you're a seller offering net terms, you're essentially acting as a lender to your customers. While it can help close deals, build loyalty, and make your offering more competitive, it also means delayed cash inflow.

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That delay impacts your liquidity, of course, you’re a business after all, there are financial priorities like 

paying your own suppliers, staff, and overhead, long before you collect on sales. Net terms can strain your cash reserves, especially if you’re growing fast or operating with thin margins.

Best Practices for Managing Net Terms 

Track due dates 

Net terms aren't something you should take for granted. There are benefits, and if you don't respect that, those benefits can disappear quickly. Use accounting software or set reminders to keep your accounts payable organized. A missed due date could leave you in a bad spot in front of the supplier.

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Take discounts when it makes sense.

There's nothing wrong with leveraging the power of some discounts. If you’ve got healthy cash flow, consider paying early to take advantage of discounts like 2/10 Net 30. Those savings add up faster than you expect, and can boost your margins with very little effort.

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Match terms with reality.

If you’re reselling products or using services to deliver client work, try to match your payment cycle with your receivables. That way, you’re not paying suppliers before your own customers pay you.

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