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The โNet 30โ Billing Trap
(Why You Should Avoid This Much-Too-Common Business Practice)
Itโs the year 2010 and Iโm talking to a colleague of mine. Sheโs a full-time freelance editor. Very talented. Very busy. And it turns out, very miserable. Iโll call her Helen and hereโs our conversation:
Helen: I havenโt had a week off in months.
Me: Congrats. Thatโs terrific. A lot of freelancers are finding it tough to hunt down work, much less stay busy.
Helen: You donโt understandโฆ it sucks. My client owes me $50,000.
Me: Uhhhโฆ excuse me?
Helen: His clients arenโt paying him โ so he can only pay me from money that comes in on other jobs heโs doing.
Me: Iโm sorry. $50,000? Why the hell are you still working for him?
Helen: I donโt have a choice. He also owes a lot of other people money. The only way I have a chance of getting paid is if I stay front and center. I have to keep working for him. I canโt afford to lose 6 months of salaryโฆ
At this point, Helen is visibly upset, frustrated and embarrassed.
Helen: And I recently found out that this guy has shut down businesses in the past to avoid paying people. I canโt let him run away from me like that.
Me: I canโt believe you let him get into you for $50K.
Of course, Helen didnโt let that client get into her for $50,000 all at once
It happened slowly, over 18 months. She explainedโฆ
Heโd miss a payment on one job. But pay fully on the next, promising to make good on the missed job. Then heโd start paying late but make up a portion of it later. Finally, for the last 6 months when sheโd start making noise heโd find just enough money to shut her up and make promises about future jobs already lined up.
And since he was keeping her fully bookedโshe was busy, unlike a huge number of her freelancing friends. But now, sheโs owed $50,000 and is terrified her client is going to disappear on her.
Our conversation turned to billing practices:
Helen: Doesnโt everyone bill Net 30?
Me: I stopped doing that. Once the job is done, Iโm just a line-item expenseโtheyโve got no incentive to pay up.
Helen: Tell me about it. And I had no idea he was going to delay paying me until his clients paid him. I had done a few small gigs for him and he paid on time. But now, Iโm at the mercy of his clients and their ability to pay. You know, Iโve got one invoice thatโs a year old. He says his client went belly-upโbut heโll make it up to me when the next big job rolls in.
I felt bad for Helenโฆ and mad at her.
It didnโt have to happen this way. Helen didnโt have to find herself in this terrible situation (not her real name, but the $50K number is accurate). And thatโs what this Insight is about.
Helen got herself into this mess because she followed poor business practices
She followed the business practices espoused by Business School graduates who fail to realize that their advice is designed for multi-million dollar businesses. Business School financial practices completely disintegrates on sub-$1 million businesses. This includes advice on leverage (borrowing money) and advice on billing practices. Itโs advice I despise because it completely discounts RISK.
This is especially true of NET 30 payment terms. I call it: The NET 30 Trap
Weโre going deconstruct why the NET 30 payment terms for freelancers is fundamentally flawed
In this Insight weโre going to cover:
- What is NET 30 payment terms?
- What is the NET 30 Trap?
- If you must, how can you make NET 30 work for you?
Iโll also cover some common objections I hear from professionals in post-production about why they canโt move away from NET 30.
Letโs start by answering, what is NET 30?
I found this good definition of NET 30 (the emphasis is mine):
In the business world, โnet 30โ refers to the length of time (in this case, 30 days) that a customer has to pay their outstanding bill. Many companies will extend short-term credit to their customers by performing a service or selling a good, and then billing their customer after the fact.
Notice, if you offer NET 30 billing termsโฆ you are extending credit to your clients. Weโll come back to this in the next section of this Insight. Now โ when it comes to paying in 30 days, thereโs a complication as you can read in this NET 30 definition from the question/answer site, Quora.com
Suppliers can set their payment periods to start from either (1) each individual invoice date or (2) from the end of the month in which all the purchases for the month are collated and summarized into a statement.
In other wordsโฆ
NET 30 means different things to different peopleโand itโs more complicated than that
If youโre going to extend credit to your clients you can modify your NET 30 terms to incentivize them to pay early. In accounting, that incentive is called a Discount Term and hereโs a good explanation from AccountingTerms.com of howโd you show the Discount Terms on your Invoices:
Discount terms. This is a two-part statement, where the first item is the percentage discount allowed, and the second item is the number of days within which payment can be made in order to receive the discount. Thus, terms of โ1/10 NET 30โ mean that a discount of 1% can be taken if payment is made within 10 days.
For a great little table showing different NET invoicing schemes, be sure to click that link for AccountingTerms.com.
If Discount Terms are the carrot, is there is stick?
In a NET 30 billing scheme there has to be a penalty for late payment and thatโs called: The Interest Rate. If you use a computerized accounting system, then itโs super easy to set up your interest rate and have that calculated automatically for you. The key is to charge a high enough interest rate that your client has a big incentive to pay on time. All you need to do is research at how much consumer credit costs and youโve got a good idea of what an โeffectiveโ interest rate looks like.
Thereโs only one problem.
How many of you reading this who bill NET 30 charge interest on late payment? My guess: None. And if you do, are you charging consumer credit interest rates? Almost definitely not.
And that gets us to the next part of this Insight, why NET 30 is a really bad idea for most small businesses and creative freelancers.
Understanding the NET 30 Trap
If youโre a small business or freelancer, NET 30 is almost always a trap for a very simple reason. Again, from AccountingTools.com (emphasis mine):
A large customer may use its purchasing power to force a supplier to agree to terms that are more favorable to the customer, such as a longer period of time in which to pay the supplier, or relaxed rules for returning goods.
NET 30 is a power play
You, the small business or freelancer, are extending credit to your clientโฆ because both of you believe the client has the balance of power. The client has work to be done. The client (in theory) has the cash. You? Youโre one of many. Thereโs a ton of other freelancers and businesses that want the clientโs business. If you donโt take NET 30, surely someone else will?
Is THAT any way to start a relationship?
Itโs like when I take on a โfreeโ job. I never do a job for free. EVER. I always require some kind of token payment (not a barter, but real money transacting hands). Why? It sets the tone. Iโm a professional. Even when I do a โfreeโ job, itโs not truly free. When a client hands transacts real money for your servicesโeven if it only pays an hour of two of your normal billing rateโthe relationship changes. Completely.
What if you refuse NET 30 and the client walks away?
How much did that client value YOU? Your specific talent? And how likely do you think they were planning on paying in a timely manner?
And letโs take it a step furtherโฆ
If you currently offer NET 30, are you charging interest?
I donโt know a single freelancing creative that bills interest to their NET 30 clients. And even fewer sub-$1 million businesses that build an interest rate into their terms. Why?
Talking about charging interest is extremely uncomfortable!
Suddenly youโre not only negotiating your rate and the cost of the job, youโre negotiating the payment terms. Who the heck wants to do that? And yet, if youโre not willing to have that discussion then, frankly, you have no business extending NET 30 credit.
Think about it: Where else in life does credit get extended without the threat of interest? Yet clients constantly gawk at the notion of paying interest to their vendors if they pay late! The horror, I know.
Have you defined when NET 30 actually begins?
Does NET 30 start on your invoice date? The date the client gets the invoice? The date work was completed? The 30 days after the end of the month you posted the invoice?
Or does NET 30 start 30 days after your client invoiced their client?
Early in my careerโwhen I extended NET 30 before understanding that NET 30 is extending creditโthis happened all the time. At 45 days Iโd call my client and theyโd tell me they just invoiced the client 5 days ago and we shouldnโt expect payment for at least 45 days.
45 days?!? AFTER my NET 30 invoice is already 15 days late? Thatโll put payment 60 days late!
Seriously: Who precisely are you extending credit to?
It drives me nuts when I extend NET 30 only to discover my client has no intention of paying me until THEIR client pays them! And the reason I got surprised? I trusted them and didnโt have this discussion with them.
If you extend NET 30 to your clients, before they hire you are you asking if theyโre going to pay you without regard to their clientโs pay schedule? If not, you have no business extending credit to your clients and you WILL get burned.
Again โ think about real life. Why do we need to provide Social Security numbers whenever we want to take out a loan? Or get a credit card? Itโs so financial institutions can run background checks and check to see our repayment history.
Are you willing to ask your client for their Social Security number so you can check on their payment history? And if theyโre only going to pay you after they get paidโฆ then youโre not only extending credit to your client, youโre extending it to your clientโs client!
NET 30 is a trap if you donโt have the resources (or stomach) for due diligence
If discussions about payment schedules, interest rates and when precisely your client will pay are not part of your protocol, then extending NET 30 will destroy your relationships with your clients. You will get burned. Frequently. Your clients WILL pay late. Or never. Youโll have to learn how to navigate small claims court. Or even hire a lawyer.
It. Will. Happen.
And after being burned so many times, youโll come to distrust EVERY client who walks in the door. Youโll hate freelancing (or running your own small business). You will experience Famine more often than Feasting. But if youโre afraid of moving off NET 30, what can you do to be more successful at it?
How to make NET 30 work for you (if you must)
Let me make clear, in Part 2 of this 2-part Insight I will offer a much better alternative to NET 30. Itโs an alternative thatโs an accepted practice in the television and film industry. It will help you maintain a healthy relationship with your clients and with yourself, as a creative professional running your own business.
But there are times when NET 30 can work for you, if youโre careful and diligent.
- Only extend NET 30 to new clients if they are legitimate, multi-million enterprises: If you read about this client in the financial section of the newspaper, thatโs a huge enterprise. These companies usually have strict financial controls in placeโฆ which include using their market clout to force favorable terms upon their vendors. BUT they also expect your invoice terms to include a carrot and a stickโwhich makes it easier to accept NET 30 terms.
- NET 30 must include a carrot: If your client is big enough, their corporate charter may require them to pay all invoices early that include Discount Terms for early payment. Donโt ask. Just include 2/15 NET 30 (or something similar) as part of your quote.
- NET 30 must also have a stick: If your client is big enough to make the financial news, itโs big enough to expect to pay Interest on late payments. Include that on your Invoice. Talk to your accountant about what interest rate their other clients are charging and then make that as part of your Quote. If a client objects to paying ANY interest on late paymentsโฆ thatโs a red flag you should not ignore. For trusted clients, Iโve been known to negotiate away interest payments.
- Donโt extend NET 30 to new clients: Again, this invoicing scheme is you extending credit to a client. 30 days after youโve performed your work, youโre just an expenseโthey no longer think of you as an asset. If you havenโt built a relationship with this client, with a proven history of prompt payments, simply state, โI donโt extend credit to new clients.โ If they canโt accept this answer, consider it a red flag that you should not ignore.
- Ask point-blank: Will you pay me before (or after) you bill your client? Their answer can be very instructive. If they say anything other than, โIโll pay you within 30 days of your invoice dateโ you can be sure youโre not getting paid on time. And remember, if your client only pays after they get paid then youโre not only banking the creditworthiness of your client youโre banking on the creditworthiness of their clientโฆ which elevates your risk even more.
- You must be willing to walk off a job for non-payment: Remember Helen and the $50,000 her client owed her? She should have walked off the job the minute her first invoice went unpaid. At what point should you do the same? That dependsโhow much money can you afford to lose? The bigger your savings account, the longer rope you can hand to your client. But know that number up front.And if your client hasnโt paid and walks in with a new gig? Make working on the new gig contingent on full payment of the old invoiceโฆ and donโt accept NET 30 on this new job. NET 30 is a privilege to be earnedโitโs a courtesy. Once the trust is broken, NET 30 is re-extended only after a period of prompt โon deliveryโ payments.
Wait Patrick! Iโll never get jobs if I donโt take NET 30
Whatโs the point of working if you donโt get paid? The one asset youโre truly selling that is un-recoverable is: Time.
A client who pays late? Theyโre stealing your time from you. They have benefited from the fruits of your labor and are now refusing to compensate, as agreed. Thatโs why NET 30 invoicing is so reliant on your client accepting Interest Rate Terms. It helps compensate you for not being able to use the money they promised you. And it helps you โred flagโ a client who doesnโt intend to pay (if they loudly object to paying interest).
If youโre not having a discussion with your potential NET 30 client about payment terms, timetables, carrots and sticksโthen youโre not executing NET 30 the way itโs supposed to be executed.
In Summary, NET 30 is extending credit
When large corporations agree to extending NET 30 terms to their clients they have people on staff who research the creditworthiness of their clients. They perform due diligence to minimize the risk of extending credit.
Are you performing the same due diligence on your NET 30 clients? Or are you blindly hoping theyโll pay you? If youโre not doing due diligence then youโre not executing whatโs being taught to those corporate MBAs.
Also remember: You must be willing to cut off clients who donโt pay on time. Keep accurate records in your accounting software. Read your aging reports. Timely payment is more than just a courtesy. If you keep working for clients who never pay on time, then you need to own your misery. Itโs not your clientโs fault. Itโs yours.
And what about Helen? I ran into her 2 years later. She was still miserable. She was still โfreelancingโ for the same guy. And no, she didnโt change her billing practices. Beyond that, I canโt sayโฆ I couldnโt continue our conversation.
Up Next: Part 2โSeveral Alternatives to NET 30 Invoicing
It would be criminal for me to put all this doubt into your mind about the much-too-accepting practice of extending NET 30 to our clients without offering a few alternatives. Thatโs precisely what Iโll do, offer two big alternatives to NET 30 in Part 2 of this Insight.
The cool thing: One alternative follows the standard practices of film studios and television networks to their production companies. If you offer your services following these protocols, you wonโt be asking for crazy payment terms. Youโll just be asking to get paid the way your clients get paid themselves. And if your client is looking for a signal of professionalism, asking to get paid this way is a huge signal that youโre a working professional.
The second alternative Iโll suggest is a little more non-standard but can work for new clients if youโre getting hired on an hourly basis by a corporate client. The key here is to time your payment schedule to their salaried staff payment schedule.