Nothing But Net Terms: A Guide to Net Terms In Business Financing
Financial flexibility has never been more in demand than it is today. The B2B marketplace is rapidly changing to accommodate the demands of buyers and increase the profitability of sellers.
With these changes comes the need to adapt and learn, whether it’s the ins and outs of B2B Buy Now, Pay Later or just understanding what net terms are. Read on to learn all there is to know about net terms as well as how BackdPayments is revolutionizing the world of B2B payments.
What are Net Terms?
Net terms, also known as trade credits or payment terms, refer to the agreed-upon timeframe within which a buyer is expected to settle an invoice or outstanding balance with a seller. It’s a common practice in business transactions where the seller extends credit to the buyer, allowing them to defer payments for a specific time period after receiving the goods and/or services.
Typically, net terms are expressed as “Net x,” where “X” represents the number of days given to the buyer to make the payment. For example, “Net 30” means that the buyer has 30 days from the time of invoice to settle the standing payment. The most common net terms range from Net 15 to a maximum of Net 90, however, variations can exist based on industry norms and individual agreements.
Common Types of Net Terms
Businesses utilize several common types of net terms in their transactions. These terms define the payment deadline and conditions for buyers to settle their invoices. Some of the typical net terms that you may come across are listed below:
Net 30: This is one of the most common net terms, where the buyer is expected to pay the invoice within 30 days of the invoice date. It provides a reasonable timeframe for payment while allowing the seller to receive funds relatively quickly.
Net 60: With Net 60, the buyer has 60 days from the invoice date to pay off the purchase in full. This term provides an extended period for payment and can be suitable for businesses with longer revenue cycles or cash flow considerations.
Net 90: Net 90 extends the payment deadline to 90 days from the invoice date. This is typically the longest net term that companies offer and is often used in industries or situations where longer payment cycles are customary, such as B2B transactions involving large orders or more complex projects.
EOM (End of Month): EOM terms mean that the buyer must finish making payments by the last day of the month following the invoice date. For example, if an invoice is issued on August 8th with EOM terms, the buyer has until August 31 to settle the payment. EOM terms can provide consistency and align payment schedules with monthly financial cycles.
COD (Cash on Delivery): COD terms require immediate payment upon delivery of the goods or completion of the service. This type of net term ensures that the seller receives payment upfront and is commonly used for transactions with new or less established customers or for cash-based businesses.
Due on Receipt: Due on Receipt is an even more immediate net term where the payment is required as soon as the buyer receives the invoice. This is often used for urgent or small transactions where immediate payment is expected.
Factors to Consider When Determining Appropriate Net Terms
When determining appropriate net terms for your business, several factors should be taken into consideration. These factors can help you establish terms that align with your financial objectives, cash flow needs, and customer relationships. Here are some key factors to consider:
Industry Standards: Start by researching industry norms and standards regarding net terms. Different industries may have common practices and expectations for payment timelines. Understanding these standards can provide your organization with a benchmark and help you remain competitive while setting appropriate terms.
Cash Flow Requirements: Assess your cash flow needs and determine how net terms will impact your ability to cover expenses, pay suppliers, and invest in growth. Consider the timing of your own financial obligations and revenue cycles, ensuring that the net terms you offer do not strain your cash flow.
Creditworthiness of Customers: You must evaluate the creditworthiness of your customers before extending net terms. Conduct credit checks, review their payment history, and consider any available credit references. This assessment can help you identify customers who are more likely to make timely payments and minimize the risk of non-payment.
Customer Relationships: Consider the nature and history of your relationships with customers. Long-standing and trusted customers may warrant more flexible net terms compared to new or unproven customers. Balancing customer loyalty with prudent risk management is crucial in establishing appropriate net terms.
Order Size and Frequency: Evaluate the typical size and frequency of orders, Larger and more frequent orders may warrant more flexible net terms to accommodate the higher value and volume of transactions. Conversely, smaller or infrequent orders may require stricter terms to mitigate risks.
Cost of Financing: Assess the potential financing costs associated with offering net terms. If you rely on external financing to bridge the gap between invoice insurance and payment receipt, consider the interest rates or fees associated with such financing options. Factor these costs into your pricing and profitability analysis.
Competitive Landscape: Understand the net terms offered by your competitors. While you should consider your unique business needs, it’s essential to remain competitive in your industry. Offering terms that are more favorable or aligned with customer expectations can give you a competitive edge.
Risk Mitigation Strategies: Implement risk mitigation strategies to protect against non-payment or late payment. This may include setting credit limits, implementing a collections process, or using credit insurance or factoring services. These strategies can help minimize the financial impact of payment delays or defaults.
Net terms are not one-size fits all and may vary based on the specific dynamics of your business. By carefully considering these factors, you can establish appropriate net terms that balance your cash flow needs, risk tolerance, and customer relationships.
Drawbacks Associated With Net Terms
While offering net terms to your clients can come with several boons and help you cater to the needs of your growing clientele, it can also hinder several aspects of your business. These can include but are not limited to:
Cash Flow Challenges: Offering net terms means that sellers have to wait for a specific period to receive payment, which can result in challenges in effectively managing your cash flow. The delay in receiving funds can affect the seller’s ability to pay suppliers, cover operational costs, or invest in business growth.
Administrative Burden: Managing the net terms requires additional administrative work. Sellers must keep track of payment deadlines, send reminders to customers and follow up on late or missed payments. This is before even considering how many different net terms that your company may offer. The administrative burden that comes with net terms can be time-consuming and may require dedicated resources or systems to ensure effective credit management.
Increased Risk of Non-Payment: Extending credit through net terms carries the risk of non-payment or late payment by buyers. There is a possibility that some customers may default on their payment obligation, leaving the seller with outstanding invoices and potential losses. This risk is higher when dealing with new or unverified customers or during uncertain economic conditions.
Impact on Profitability: The cost of offering net terms, including the risk of non-payment, administrative overheads, and potential financing costs, can impact the seller’s profitability. Sellers may need to account for these factors when determining pricing and assessing the overall financial viability of providing net terms.
BackdPayments: Net Terms Revolutionized to Help Your Business Grow
Do you want to increase your sales while providing instant financing and net terms to your business customers? With BackdPayments integrated into your checkout process, you can increase your client base by up to 30% and grow your average order value by more than 250%.
Buyers get access to Net 30 terms at zero percent interest, while your business receives full payment right away. Discover how BackdPayments gives your customers the financial flexibility they want without adding any risk or delay to your cash flow.
