Updated January 24, 2022
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 terms 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 why and how companies offer net 30 terms and why instant payouts may be a better alternative than credit terms for marketplace and dropship programs. Finally, we feature a practical case study from HLC Bike - a North American bike distributor that has leveraged a net terms program in service of its customers and the bike industry for over 30 years.
Why do companies offer net 30 terms?
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.
Risks with offering net 30 terms
- Late payments: offering net terms is like being a bank to your customers. 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.
Late payments and non-payments affect businesses differently depending on their size. 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. - Fraud: 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.
- Additional costs: 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.
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.
How to offer net 30 terms to your customers
Businesses offer net 30 terms to their customers in their invoices in their due dates. If an invoice to a customer is dated March 15th and the payment due date is April 15th, then a business has offered that customer net 30 payment terms.
Net 30 terms can be calculated in a variety of ways:
- 30 business days or 30 calendar days;
- 30 days from the product’s purchase date vs. invoice date;
- Net 30 end of the month (EOM) - payment is due 30 days after the end of the month in which the invoice was issued.
Whichever method you choose, make sure your customer is aware of it ahead of time so that both of you are on the same page.
In retail, payment terms like net 30/60/90 are common for wholesale transactions because retailers purchase inventory in bulk and have to generate sales before they can pay brands. For marketplace and dropship transactions, net 30 terms aren’t a common payment option because retailers don’t hold inventory and capture the customer’s payment on each transaction. For example, Amazon pays sellers on its marketplace every two weeks (net 15).
Instant payouts are a better alternative to net 30 terms
At Convictional, we believe in payout terms that offer the most benefit to sellers without putting retailers in a negative cash position. We offer instant payouts within 24 hours to seller bank accounts through our payments provider Stripe.
Sellers can automatically send invoices to their buyers with Stripe after they have fulfilled orders. Stripe will automatically charge the buyer’s credit card for the total on the invoice. This usually happens one hour after the invoice is created.
Here is a sample agreement template we recommend to new buyers in our network:
[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.
For buyers and sellers who transact via EDI, we enable sellers to invoice their buyers via 810 EDI documents (invoices). This then allows buyers to ingest the 810s and pay their sellers on a fixed schedule, which often ends up being 30 days.
“Use net terms to help your customer”: HLC Bike case study
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 a strong partnership relationship with its customers, succeeds in obtaining excellent credit ratios.
Better cash flow management starts with your payment terms
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.”
If you’re a retailer running a marketplace or dropship program, consider which payment terms will improve your marketplace’s health. Net 30 terms could hinder your efforts to sign up sellers and add SKUs to your marketplace, while instant payouts could act as an incentive for sellers to sign up and start transacting with you quickly.
Choose the right payment terms for your marketplace and dropship program today with Convictional. Our team can help you navigate through all your terms options and design a policy that works best for you and your sellers. Get started by contacting our team today.
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