Utah General Contractors - Business and Law Practice Exam

What does the term "1/10 Net 30" mean in payment terms?

1. 1% discount if paid within 10 days; otherwise, the entire amount is due within 30 days

2. 10% discount if paid within 1 day; otherwise, the entire amount is due within 30 days

3. No discount if paid within 10 days; otherwise, the entire amount is due within 30 days

4. 1% discount if paid within 30 days; otherwise, the entire amount is due within 10 days

The correct answer is: 1% discount if paid within 10 days; otherwise, the entire amount is due within 30 days

The term "1/10 Net 30" is indeed indicative of a payment term that specifies a discount for early payment. This terminology means that the buyer is entitled to a 1% discount on the invoice amount if payment is made within 10 days of the invoice date. If the buyer does not take advantage of this discount, the total invoice amount is due in full within 30 days. This setup serves as an incentive for early payment, helping the seller manage cash flow while rewarding customers who pay promptly. Understanding these payment terms is crucial for both contractors and clients as it impacts financial planning and cash flow management. The use of discounts can encourage timely payments, which is essential in the construction industry where cash flow can often be tight. In contrast, the other options misinterpret the terms, either misrepresenting the discount percentage, the time frames for the discount and full payment, or the conditions under which payment is due, leading to confusion regarding the intended contractual obligation.