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When a business offers “net 30 terms”, it's offering payment terms and allowing its customers 30 days from the invoice date to pay the amount due. Businesses that offer net 60 or net 90 terms give customers 60- and 90-days, respectively.
These payment terms may come with a percent discount for early payment, often 2%. Invoices that remain unpaid after the due date often incur late fees.
Net terms are most commonly used in the B2B world. B2C businesses often call this a financing, installment, or payment plan.
In this article, we go into detail on how you can go about building a net terms program that minimizes the financial risk that offering credit terms to your customers poses.
We weigh the pros and cons of a net terms program, including how to assess whether or not your customer should pay with net terms or with a credit card. Finally, we feature a practical case study from HLC Bike - a North American bike distributor who has leveraged a net terms program in service of its customers and the bike industry for over 30 years.
According to small business invoicing software Freshbooks, offering net terms as a business can be a serious competitive advantage:
“Generally speaking, business owners who offer net terms are able to drive more sales than those that do not because they’re able to sell to clients that have cash flow problems. In other words, they use trade credit to gain a competitive advantage over their peers who refuse to be as flexible.”
Similarly, net terms automation company Resolve found that sellers who begin offering net terms see a 30% boost in sales.
These rewards, however, come with risks.
Offering net terms is like being a bank to your customers. There’s always the risk of late payments. You’re letting them “borrow” inventory from you, in exchange for the promise that the client pays you back in 30 days. If the business environment changes, they could default on their payment.
You might even be defrauded by individuals who never intended to make a full payment in the first place. The Association of Certified Fraud Examiners found that U.S. businesses lose an average of 5% of gross sales to fraud.
To soften the potential harm of these risks, you need to do a business credit check on new clients before giving them any form of trade credit.
Credit checks often take weeks to compile and submit to a credit bureau like Dun & Bradstreet. Each credit check can cost anywhere between $50 - $150 to do. On top of this, you might also need to solicit and contact your customer’s trade references to verify your customer's payment history.
After you invoice your customer for the inventory, you need to enforce your terms, collect payment, and maybe even consider writing off bad debt if they file for bankruptcy.
Freshbooks analyzed over 20 million invoices and found that 64% of small businesses suffer from late invoice payments when they extend trade credit. As a result, these businesses struggle with cash flow problems, month to month.
Depending on the volume of transactions, a larger business might have to look at hiring employees to handle account receivables for them. Lockstep Collect recommends staffing at least one full-time employee for every 1,000 invoices created per month.
Alternatively, you could work with a B2B payments automation service like Resolve. They automate business credit checks, keep track of net terms for each customer, and can even pay you up to 90% of the total amount on the invoice upfront.
Finally, if you’re an online B2B seller, then you might not have the enterprise-level order frequency and transaction volume to make running a net terms program worthwhile. If so, you can always accept credit card payments from your customers. In this case, it’s a win-win: the credit card company extends net 30 terms to your customer for you, and you get paid upfront.
Here is a sample agreement template we recommend to new wholesalers in our network. Note that the verbiage is specific to Convictional: we use Stripe as a payment gateway and charge buyers’ credit cards once an order has been fulfilled.
[Brand Name] will receive a payout from Stripe (Convictional) within 24 business hours after the item has been marked as shipped with a tracking number. The tracking number must be from a North American Postal Service including, but not limited to: Canada Post, USPS and more.
In HLC’s over 35 years in business, it’s found that long payment terms promote poor cash management and, as a result, may be detrimental to many customers.
Because many small business owners struggle with disciplined cash flow management, a net terms program may end up hurting a small business that might be better off putting orders on credit. In fact, small businesses owners with great credit scores might benefit more from paying with a credit card than using a seller’s net terms program
Derrick Boatwright, Director of Commercial Innovation at HLC Bike, advises sellers to take the extra step to deeply understand whether or not longer payment terms solves a real problem for their customers.
He says, “For those who aren’t disciplined enough to take advantage of the benefits of net terms. Extending credit might get the dealer into a position where they never learn to manage their cash flow properly. Then when it comes time to pay the net amount they’re not able to do so.”
For example, payment terms might work against businesses who do a high percentage of their business transactions online. These businesses get paid the full amount for the product, even before they’ve placed an order for an item. Derrick emphasizes, “This type of business might not need 30 days because they already have the cash in hand.”
HLC Bike prides themselves on leveraging net terms to incentivize healthy cash flow management amongst independent bike dealers, even when the dealers struggle to make their payments.
Derrick says, “We’ve had customers who found themselves in hard times. We work with those customers to get them current so that they can still operate their business. The worst thing we could do is shut them down entirely. With customers who have been with us for 20–30 years and fall on hard times because of COVID, for example. It’s in everyone’s best interest that we work together to get through that, even if it takes a period of several years.”
Thanks to this business philosophy, HLC’s credit department, which maintains an strong partnership relationship with its customers, succeeds in obtaining excellent credit ratios.
Businesses on the receiving end of your net terms program might be tempted to buy more inventory from their revenue, instead of paying their debts off quickly and avoiding fees. Stores that don’t use sales profits from high turnover items to pay down invoices for slow-moving items will eventually ruin their credit or have to dig into savings.
On the other hand, offering net 30 terms could pave the way towards helping your customer get their business off the ground. For example, HLC has offered small $1,000 - $5,000 invoice payment terms just to help certain shops get up and running. “Even if someone has poor or no credit,” Derrick says, “We see it as an interesting opportunity for HLC to introduce that human element again. Before long they’re operating on a pretty large payment term or credit limits.”
The opportunity to offer net 30 terms is a business decision that could help or hurt your trade relationships. But ultimately, business is about people. And when a net terms program is executed with your customer’s best interest at heart, both parties win.
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