Net 60

Definition

Net 60 is a payment term used in business transactions, particularly in the context of wholesaling and short-term financing. It refers to the time period in which a customer or client is expected to pay the full amount owed, typically within 60 days of receiving the goods or services.

5 Must Know Facts For Your Next Test

1. Net 60 payment terms are commonly used in wholesale transactions, where suppliers provide goods to retailers or other businesses on credit.
2. Offering net 60 terms can help wholesalers attract and retain customers, but it also requires careful management of accounts receivable and cash flow.
3. Short-term financing, such as lines of credit or invoice factoring, can help wholesalers bridge the gap between extending net 60 terms to customers and receiving payment.
4. Businesses that offer net 60 terms may need to account for the risk of late or non-payment, which can impact their own financial stability and liquidity.
5. Negotiating favorable net 60 terms with suppliers can also be an important aspect of obtaining short-term financing for a business.

Review Questions

• Explain how net 60 payment terms are typically used in the context of wholesaling.
  • In the wholesaling industry, net 60 payment terms are commonly used to allow retailers or other businesses time to sell the goods they have purchased before needing to pay the wholesaler. This helps the retailer manage their cash flow, as they can use the revenue from selling the goods to pay the wholesaler within the 60-day timeframe. For the wholesaler, offering net 60 terms can be a competitive advantage in attracting and retaining customers, but it also requires careful management of accounts receivable to ensure timely payments and maintain their own financial stability.
• Describe the relationship between net 60 payment terms and a business's need for short-term financing.
  • When a business offers net 60 payment terms to its customers, it can create a gap between the time when the goods or services are provided and when the business receives payment. This can put a strain on the business's cash flow and liquidity. To bridge this gap, businesses may need to seek short-term financing options, such as lines of credit or invoice factoring. These financing solutions allow the business to access the funds owed to them before the 60-day payment period is up, helping to maintain their own financial stability and meet their own payment obligations. Negotiating favorable net 60 terms with suppliers can also be an important aspect of obtaining short-term financing for a business.
• Analyze the potential risks and challenges that a business may face when offering net 60 payment terms to its customers.
  • Offering net 60 payment terms can expose a business to several risks and challenges. First, there is the risk of late or non-payment by customers, which can negatively impact the business's cash flow and financial stability. Businesses must carefully manage their accounts receivable to ensure timely payments and minimize the risk of bad debts. Additionally, the extended payment period can tie up a significant amount of the business's working capital, limiting its ability to invest in other areas or respond to unexpected expenses. Businesses must also carefully consider the opportunity cost of offering net 60 terms, as the delayed payment may forgo the potential benefits of receiving payment sooner. Overall, the decision to offer net 60 terms requires a thorough assessment of the potential risks and benefits to the business's financial health and long-term sustainability.

Related terms

Trade Credit:

A type of short-term financing where a supplier allows a customer to delay payment for goods or services, often with a net 60 or similar payment term.

Accounts Receivable:

Money owed to a business by its customers for goods or services provided, which includes net 60 payments.

Cash Flow:

The movement of money into and out of a business, which can be impacted by net 60 payment terms and the timing of accounts receivable.