Setting Payment Terms
If you are a start-up or small or medium sized business looking to acquire new customers, offering flexible payment terms might be the solution you didn’t know you needed. To manage cash flow properly, businesses need ample time frames to acquire products, store them and sell them. This is especially true for wholesale businesses that require large inventory and upfront investments. That is why setting payment terms that are flexible like Net 30 is a good strategy to increase sales and build long-term relationships with your customers.
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Net 30
Net 30 is a payment term commonly used in B2B (Business to Business) transactions that allows customers to settle an invoice within 30 days of receiving it. For example, if you are a business owner and have just received an invoice for purchasing goods or services from a supplier on August 1, you have time till August 31 to make the full payment.
Net 30 typically includes non-business days which means that the 30-day period starts on the date you receive the invoice, regardless of whether that day falls on weekends or holidays.
A major advantage of Net 30 from the buyer’s perspective is the improved cash flow management. Businesses can better utilize their operating funds to cover expenses and other essential financial obligations like paying mortgages or bank loans. It also gives them ample time to assess the quality of the products and services bought.
Net 45, Net 60 and Net 90
Just like Net 30, various other payment terms are commonly used in B2B transactions.
The number following “Net” indicates the number of days a customer has to pay an invoice in full.
Net 45: Pay invoice in 45 calendar days.
Net 60: Pay invoice in 60 calendar days.
Net 90: Pay invoice in 90 calendar days.
The longer payment terms like Net 60 and Net 90 are usually offered by businesses to buyers with a high level of creditworthiness and a strong financial history.
Early Payment Discounts
Businesses offering Net 30 invoice terms have to consider the risk of late or non-payment which can stifle cash flow and result in financial losses.
Consider a medium-sized manufacturing company that produces automotive parts. It offers Net 30 payment terms to major clients and invests heavily in raw materials and labor.
Cash Crunch: If the clients do not make payments within 30 days, the company faces cash flow issues and cannot pay their employees or suppliers on time.
Production Delay: If cash flow is severely affected, the company has to reduce production or suspend operations. This can damage customer relationships and affect supply chain operations.
Increased Financing Costs: To overcome this situation, the firm might have to borrow money from financial institutions at high interest rates which will reduce net income.
So how can the manufacturing firm avoid such an outcome?
Businesses can include early payment discounts while providing Net 30 terms to customers to encourage them to pay their invoices sooner. These usually include:
1/10 Net 30: Buyers are given a 1% discount if they pay their invoice within 10 days of receiving it. The full amount is due within 30 days.
2/10 Net 30: Buyers are given a 2% discount if they pay their invoice within 10 days of receiving it. The full amount is due within 30 days.
3/10 Net 30: Buyers are given a 3% discount if they pay their invoice within 10 days of receiving it. The full amount is due within 30 days.
As the discount percentage increases, the incentive for early payment becomes more attractive to buyers. However, it’s important to note that offering a higher discount can also reduce the seller’s profit margin.
Is Net 30 Payment Term Suitable for SMBs?
Just like the two sides of a coin, Net 30 payment terms offer advantages and disadvantages to SMBs.
Advantages of Net 30 for SMBs
Acquire New Customers: The marketplace is highly saturated with buyers and sellers and often the former are looking for flexibility on making payments. A business that offers Net 30 payment terms certainly has a competitive advantage over one that doesn’t, as they can attract new customers.
Customer Loyalty: Net 30 can be viewed as a form of advanced credit that is based on trust between two parties. Although additional charges might apply if the payments are not made before the deadline, stronger customer relationships can be forged this way.
Increased Sales: Businesses will choose to make bulk orders if they have ample time to make the payment.
Disadvantages of Net 30 for SMBs:
Cash Flow Issues: Extended payment terms can result in cash crunch. SMBs might find it difficult to manage operational expenses if they do not have proper cash reserves.
Credit Risk: There’s an increased risk of late or non-payment, which can impact the business’s financial health as we discussed with the example of the manufacturing company earlier.
Managing Net 30 Risks for SMBs:
Customer Selection: Carefully establish a credit evaluation process to differentiate between creditworthy customers who will pay on time and those who might default.
Efficient Collection Processes: Having clear and timely collection procedures in place can help recover outstanding payments.
OnlineCheckWriter.com- powered by Zil Money lets businesses create invoices easily and send them to clients via email or SMS. You can also use the check printing platform to request payments through payment links.
Factoring or Financing: Consider options like invoice factoring or lines of credit to overcome cash flow gaps.
Use Shorter Payment Terms: Businesses can offer Net 0, Net 7 or Net 15 to ensure that cash flow is maintained.
