If you want to run a successful trucking company, then you must prioritize your cash flow stability. One way to accomplish this is to select invoice payment terms that are favorable to both your company and your clients.
While there are many different invoice terms that you can use when billing customers, net 7 payment terms are one of the most effective for trucking companies. Read on to learn why that is.
How Do Net 7 Payment Terms Work?
As the name suggests, net 7 is a phrase that means the payment is due within seven days of the date that is listed on the invoice. For instance, if you make a delivery on June 10, 2022, and you invoice your client the same day using net 7 payment terms, the bill is due no later than June 17, 2022.
When Do Net 7 Payment Terms Take Effect?
Typically, net 7 payment terms take effect on the day that the invoice is created. However, the terms can also take effect on the day that the client purchases products or services.
To keep things simple, let’s stick with the aforementioned delivery date of 6/10/2022. Instead of invoicing the client on the delivery date, you could send them an invoice on the day that they purchased your services.
Let’s say that they contracted with you for delivery on June 7, 2022, and you picked up the load on the same day. If you invoiced them with net 7 payment terms on June 7, then the payment would be due by June 14.
How Do Net 7 Payment Terms Affect Cash Flow?
Offering any sort of net payment terms can slow down your cash flow, even if your customers are making payments on time.
Longer agreements like net 30 payment terms can be particularly detrimental to your business if it is on the smaller side. You may not have the financial leeway to sustain operations for weeks without receiving income.
Therefore, many small to medium-sized carriers find that net 7 payment terms are a more practical option for their companies.
What Are the Industry Standards for Payment Terms?
For years, net 30 payment terms have been the industry standard in the trucking sector. However, a variety of recent developments have prompted many trucking companies to rethink their billing practices. Quite a few carriers have transitioned to net 7 payment terms or pay-on-delivery billing models.
Common Net Payment Terms for Trucking Companies
Before you can determine whether net 7 payment terms are the best billing solution for your trucking company, it is important to understand what other options are out there. Some other common invoice payment terms include the following:
Net 30 Details
The phrase “net 30 payment terms” means that your clients have up to 30 days to settle outstanding invoices. While some companies may opt to pay these invoices well before the 30-day mark, many will not unless you offer incentives to do so.
The aforementioned net 7 payment terms are the shortest variety of “net terms” that you can use when invoicing. However, there are other payment options available, which are outlined in the next segment.
Other Payment Options
Two less common payment options that can help you settle debts faster than net 7 payment terms are “cash upon delivery” and “pay in advance.” Both options will ensure that you receive payment fast. However, clients typically prefer net payment terms and may choose to do business with different carriers if you strictly use these options.
Therefore, you should only use these options when you have concerns that the client will not pay you on time.
Example of Net 7 Payment Terms
You should inform clients that you use net 7 payment terms when negotiating a contract. This information should be reiterated on the invoice that you provide.
To recap, the phrase net 7 payment terms means that you are requesting payment within seven days of the date on the invoice. If you invoice a client on June 1st, 2022, using net 7 terms, then they are expected to deliver payment by or before June 8th, 2022.
Things To Consider with Payment Terms for Your Trucking Business
When selecting which payment terms to use, you should consider factors such as:
Without a steady flow of cash, you cannot sustain normal operations. Therefore, it is vital that you select payment terms that will help you stabilize cash flow. While it is possible to maintain a strong cash flow using net 30 terms, you must be generating new invoices every couple of days. Otherwise, you may experience cash flow gaps.
Early Payment Discounts
Consider offering early payment discounts if you want to incentivize your clients to pay their debts sooner. For example, you can invoice them using 2% 5 net 7 payment terms.
What this means is that clients are still expected to render payment within seven days. However, if they make payment within five days or fewer, they will receive a 2% discount on their bill.
Offering net 7 payment terms instead of net 30 terms can give you an advantage over other trucking companies operating within your region. While your competitors are waiting around for weeks to receive payment, you can put your recent earnings to use to buy new equipment, advertise services or hire more drivers.
Client history should have a strong influence on which payment terms you offer. When working with a trusted, established client, offering longer payment terms carries little risk. Conversely, you should avoid using long payment terms when working with first-time clients or companies that have a history of paying late.
Your clients should be able to pay smaller invoices relatively quickly. However, established clients will appreciate being given extra time to settle larger invoices.
Therefore, you should consider using net 30 terms if you have recently wrapped up a major contract for a trusted client. Alternatively, you could establish an installment-based payment plan so that the client can send you funds throughout the 30-day repayment window.
Advantages of Net 7 Payment Terms
Net 7 payment terms offer the following advantages:
- Protection of cash flow
- Facilitation of rapid repayment
- Preservation of business continuity
- Quick freeing up of working capital
If organizational agility and rapid repayment are top priorities for your company, then you should strongly consider using net 7 payment terms.
Disadvantages of Net 7 Payment Terms
Net 7 payment terms are not without their disadvantages. Specifically, net 7 terms:
- May not appeal to some clients
- Might make it difficult to offer early payment discounts
- Cannot completely protect you from cash flow problems
In most instances, net 7 terms are certainly more advantageous than net 30 terms. However, there are still times when using the latter would be beneficial to your business.
Net 7 vs. Net 30 Payment Terms
The only real difference between net 7 and net 30 payment terms is how long your clients have to pay their obligations. When using the former, you are giving them seven days to settle their invoice. Conversely, the latter offers them an entire month to deliver payment.
Net 7 terms can help prevent cash flow issues. They also give clients ample time to pay their debts, even if they would prefer net 30 terms. Put simply, net 7 terms strike a perfect balance between drawn-out net 30 terms and pay-on-delivery billing models.
Protect Cash Flow with Net 7 Payment Terms
In most circumstances, net 7 payment terms are the optimal invoice payment terms for trucking companies. Longer invoice terms could lead to unstable cash flow and ultimately threaten business continuity. Conversely, billing terms like “pay on delivery” or advanced pay can be less appealing to shippers or brokers.
Net 7 payment terms represent a great “middle ground” that benefits both you and your clients. Therefore, you should strongly consider using these net terms for the vast majority of all transactions.