Net terms have long been a staple of the B2B world — and are still a go-to financing solution for both buyer and seller alike.
In fact, as recently as 2019, TreviPay found that 82% of B2B buyers specifically choose to do business with vendors that offered net terms of up to 90 days.
But, well…a lot has happened in the last three years — and many small business buyers and sellers have realized that traditional net terms aren’t nearly as useful today as they once were.
What are Traditional Net Terms?
First, a quick refresher on what net terms are and how they work.
Net terms is a form of trade credit extended to B2B buyers that allows the customer to pay off purchases over a specified period of time. Vendors typically extend terms up to 30, 60, or 90 days — referred to as net-30, net-60, and net-90 terms, respectively.
Once a purchase is made, the vendor then delivers the product or service as usual. After the order has been fulfilled, the buyer will then have 30, 60, or 90 days to pay off their balance in full to avoid additional charges.
Vendors may offer discounts to incentivize early payments from their customers. For example, a “3/10 Net 30” agreement means the buyer will receive a 3% discount if they pay off their balance within ten days — but otherwise has 30 days to do so without penalty.
6 Reasons Offering Traditional Net Terms is No Longer
Best for Your Small Business
To be sure, offering net terms to your customers is better than not offering them any form of financing at all.
But, in many ways, this traditional route is simply incompatible with the dynamic nature of modern B2B operations and relationships.
Here’s what we mean.
1. B2B Buyers Want (and Need) Better Terms
As we said, offering net 30, 60, and 90 terms has been par for the course for decades.
But today’s B2B buyer is a far cry from those of the yesteryear — and both their needs and preferences have changed with regard to financing.
For starters, many buyers just can’t afford to pay off certain purchases within 90 days. As our data shows, 80% of customers actively seek out brands offering terms between three and twelve months.
Couple this with the fact that 57% of B2B payments were late in 2020, and the message is loud and clear:
Today’s B2B buyers need longer payment terms.
And, even when they don’t need longer payment terms, they certainly appreciate the convenience it brings to the table. In many cases, we’ve seen buyers finance $18 purchases alongside thousand-dollar equipment to keep things optimized and streamlined on their end.
Though 90-day payment terms may have been the norm for some time, buyers now need more dynamic and personalized solutions that meet their financial needs at any given moment. If all you offer is a boilerplate, one-size-fits-all financing service, your customers may begin questioning your dedication to their success.
2. Offering Net Terms Reduces Cash Flow
Offering net terms has been proven to increase average order values by up to 30%.
But, you of course don’t receive this amount in full until your customers pay up. Ironically, you’ll be making more sales and revenues than ever before — but might end up dealing with more cash flow issues than you previously were.
Now, for established businesses with enough coin in the coffers to float customer purchases ten times over, this isn’t exactly an issue.
But small, growing businesses like yours can always use a little more cash on-hand to reinvest into expansion and improvements in all areas. Being too loose with net terms can potentially cause you to miss out on major opportunities for growth, simply because your customers haven’t paid off their balances.
And you’ll find yourself in even worse financial straits should disaster strike your business. In worst-case scenarios, you’ll need to seek out additional financial assistance — again, all while business looks to be booming on paper.
3. Risk of Late and Non-Payments
These potential cash flow issues can quickly become more severe should your customers fail to pay off their balances on time.
Which, unfortunately, many in the B2B world seem to have a habit of doing.
Remember how we said more than half of B2B payments were late in 2020?
Well, it turns out that figure was actually 62% in 2019 — so it wasn’t just a fluke brought on by the pandemic.
While a number of factors play into this figure, the point is you’ll always have to deal with late payments when offering net terms to your customers.
Not only is thinking otherwise unrealistic; it could also be damaging to your business.
If you haven’t planned for late payments before the money fails to show up, it’s going to interrupt your cash flow. This can easily interrupt your day-to-day operations — along with your team’s growth-related initiatives.
Then, there’s the matter of recouping funds from your delinquent customers. Whether you handle these instances yourself or hand them off to a legal team, you’ll be spending excess time, energy, and money that could have instead been invested in growing your business.
In certain cases, you might determine that chasing after a customer for a rather small amount simply isn’t worth it — which equates to a loss for your business, nonetheless.
No matter how trustworthy your clientele may be, missed payments happen for a variety of reasons when offering net terms. Regardless of why they occur, a single instance can wreak havoc on your immediate operations and your future plans.
4. Incentives Cut Into Profits
As with all promotions, sales, and other monetary incentives, offering discounts to customers who pay off their balances early will cut into your profit margin.
And, while these incentives aren’t usually too substantial, they do scale with order value. So, you’ll be losing a proportionate amount of revenue every time a customer takes advantage of your offer.
It can become a problem, though, if more of your customers suddenly become able to immediately pay off their bills. Left unchecked, you can end up handing out 3% discounts way more freely than you’d anticipated.
To keep this from happening, you’ll ultimately need to amend the terms of the offer from time to time. This will help keep usage rates (and profit loss) at a manageable level; but it can also cause issues with customers who may no longer be eligible for the discounts they’d come to expect.
So, on top of the actual incentives cutting into your profits, you’ll also be spending additional resources managing the overall initiative, as well.
On that note…
5. A Significant, Ongoing Investment
Offering in-house net terms is an incredibly involved process that requires a significant investment of time, resources, and manpower.
Your accounting team, for one, will have a number of new responsibilities to take care of, such as:
- Keeping track of payments and unpaid accounts
- Scheduling payment reminders and alerts
- Delivering rebates for early payers
Customer service and support will also see an influx of tickets and questions regarding your net terms processes and policies. And your marketing and sales teams will need to begin implementing the new initiative into your messaging and campaigns.
If you’re not prepared to keep it all running like a finely-tuned machine, you run the risk of missing payments, alienating your customers, and doing major overall damage to your business.
Even if your team is equipped to handle the additional workload across the board, you’ll still be investing a ton of resources into what’s essentially a secondary service. Put another way, you’ll have fewer resources on hand to put toward improving your core offering and other more impactful areas of your business.
6. Cost of Piecemeal Outsourcing
Knowing just how resource-heavy offering net terms can be, teams opt to outsource the parts of the process that they’re perhaps least equipped for.
Many teams outsource their additional account tasks, either in whole or in part. For example, some may rely on collections agencies to deal specifically with late payments — while others may partner with accounting firms for more comprehensive services.
Vendors also outsource tasks related to risk assessment and credit checks, especially when working with newer clients and younger businesses. Even when handling these assessments in-house, teams will often pay to run credit checks on their customers before extending lines of credit to them.
Even just on the surface, the problem of cost is pretty glaring.
But it’s incredibly easy for your outsourcing costs to pile higher and higher when taking this piecemeal approach.
For one, you’ll need to scale up usage of each service as your company grows and your needs evolve. Similarly, you might eventually identify other processes that would be better to outsource — which will add yet another ongoing operational cost to your ledger.
On top of the monetary costs of outsourcing, you’ll also need to maintain positive relationships with your various partners. As complex as supplier relationship management can be, adding more parties to the mix only makes it more so.
Evolving Beyond Net Terms
The traditional approach to offering in-house financing through net terms just doesn’t work as it once did.
Given the changes in customer expectations and the growing costs of operations — not to mention the ever-present risk of extending credit as an internal service — it’s no surprise many B2B teams are leaving net terms in the past.
And they're moving forward toward Buy Now, Pay Later services like Credit Key.
Credit Key is the premiere BNPL provider for B2B vendors and their customers. Our comprehensive financing services allows you to extend even better terms to your audience — while taking all of the added responsibilities off your plate.
With Credit Key, your customers get:
- Lines of credit up to $50,000
- Repayment terms up to 12 months
- 0% APR for 30 days (and fees starting at 1% monthly, after 30 days)
Once they make a purchase using Credit Key, we’ll instantly pay out the purchase amount to your business in full. We then assume all responsibility for collecting payments — and for taking action should customers fail to pay on time.
For your team, this means:
- Immediate cash on hand — and no stoppage of cash flow
- No additional, ongoing accounting processes
- No risk of losing revenues (and customers) due to non-payment
And, because we offer an all-in-one service, you won’t have to piece together a financing program via a revolving door of third-party providers. If it has to do with BNPL financing, you can be sure Credit Key will have you covered.
For the better half of a decade, Matthew has been submerged in the B2B Payments and Accounts Receivable as a Service space. As the Marketing Director of Credit Key, Matthew has an in-depth knowledge of sales and demand generation growth strategies.View All Articles
Topics from this blog: B2B Payments Finance