B2B businesses that look to sell to their customers online face myriad challenges when figuring out payments. Credit cards as an online operation can prove expensive for wholesale businesses, especially those working on tight margins. So many B2B business turn to Net Terms, allowing their customers to pay later. But, Net Terms comes with its own risks and issues to a business.
In today’s post we’ll review the definition of Net Terms, look at the value of Net Terms on a B2B business, the challenges with it, and ways to reduce the risk of offering Net Terms.
What Are Net Terms? Understanding Your Options
Net Terms is a structure where businesses have a line of credit with a seller and are able to pay their invoices a set number of days after order, or after shipment, depending on the arrangement. Each business will have different terms arranged with the seller. The idea of selling on terms is traditionally found in B2B sales.
As such, instead of requiring upfront payment like many B2C websites do, Net Terms allows businesses to place an order, be invoiced for that order and pay it within a certain window of time. Common windows of times can be Net 15, Net 30 and Net 60 terms (the number referencing the number of days after the order, or shipment, an invoice is due).
Traditionally, B2C online businesses require some form of upfront payment. This generally comes in the form of accepting a credit or debit card. When paying with a credit card, the merchant is being paid instantly, but the customer is effectively financing the purchase through a pre-approved credit line from their bank via their credit card. Even if you’re buying with a store card, most of the time it’s backed by a bank that’s offering the credit line and financing.
A traditional Net Terms transaction is similar to the consumer Buy Now, Pay Later option, but has a key difference: The merchant is effectively extending the credit for the length of time it takes to get paid. The merchant pays for the goods either through its purchase or the manufacturing of said goods and ships it to their customer. Then, based on the Net Terms agreement, a customer agrees to pay them within a certain window of time.
By not requiring cash upfront, B2B businesses can generally drive more sales and higher average order values (AOVs) than if they required an upfront payment, which can be beneficial for driving sales volume.
The Challenges of Net Terms
That same benefit of driving more sales can also be a risk: Effectively a B2B Ecommerce business’s cash is tied up in inventory they already delivered, until such time as they receive payment for it. For smaller B2B businesses that can be expensive and challenging, as your cash is effectively tied up.
Another challenge is that those B2B businesses are generally responsible for collecting the money, through an in-house bookkeeper or third-party firm that does so on their behalf. As such, many times businesses get paid in clumps, when the bookkeeper does a round of reminders to people who owe money.
Finally, there is the fact that many invoices are simply not paid on time:
- 57% of business report customers paying late
- 60% of small businesses cite cash flow issues as having been a problem for their business
- The average term length was 4 weeks, but the average payment was made in 8 weeks
All of this means B2B businesses see their cash tied up even longer, and perhaps permanently when an invoice has to be written off, a very expensive drag on cash flow that can impair growth and in extreme cases even pull businesses under.
Making Net Terms Less Risky
Fortunately, there are steps that can be taken to reduce the risk for B2B Ecommerce businesses selling with Net Terms. Checking credit is one way to do so, and extending terms at limits that minimize risk at first. A customer that has built a solid reputation for on-time payments may qualify for a better opportunity than one new to a business.
There are also companies emerging that offer the ability to finance Net Terms, just like a credit card company does for B2C customers.
Although not the same as Net Terms, there is also Buy Now Pay Later, which is growing in popularity in the B2C space and is beginning to get a toehold on B2B transactions as well. While the payment structure looks different, for the seller it’s similar – risk is taken on by the payment provider, and you get paid quickly, minus a fee for their management of those scenarios.
Now let’s take a look at the pros and cons based on who is responsible for the terms, and how to manage them. This will determine the risk profile, and cash flow implications, for each.
Who Extends the Terms
One core area where you can make a decision is who actually extends the terms offering, and is on the hook for offering the credit. There are two ways this can be handled.
1. You Extend the Terms
Many businesses will internally simply manage Net Terms by giving their customers a set window of time to pay their invoice. In essence, they’re extending the courtesy of receiving a shipment before they have to pay for it.
Pros: You more fully own the relationship with your buyers. You know your buyers well, and can use your history with them to determine who is the best choices to extend terms.
Cons: If they are late or fail to make a payment, you and your business are left on the hook and therefore take on the risk yourself. From a cash flow perspective, you’re spending money and delivering merchandise before getting paid for it.
There are now some companies that will pre-pay you for invoices you have on hand, for a fee, so you can gain some cash flexibility upfront. Of course, this does come at a cost.
2. Someone Else Extends the Terms
There are third-party companies that will offer Net Terms on behalf of you to your customers.
Pros: They’ll pay you much more quickly (in as little as a day), so you don’t have to wait until a buyer pays their invoice to collect, improving cash flow. They take on the risk for the terms, so if a buyer is late or does not pay, they will absorb that. They handle all bill collection for the purchases they approve.
Cons: You pay them a percentage of each transaction they finance, just like you’d pay for credit card or other purchases of that nature. Low margin businesses, in particular, may not be able to float such a spread. They decide who is approved, so some of your buyers may not be accepted for terms.
For some businesses, paying a percentage to not have to chase down late payments or take on the risk may be money well spent; for others, it may not be an expense they wish to take on. Fortunately, both options exist for businesses to leverage, and they can even be mixed or matched depending on the scenario.
Options for Managing Your Own Terms
If you decide to go it alone, there are also multiple ways for managing your own terms, sending invoices and collecting payments. There are benefits and drawbacks to each of these options, but having multiple ways forward gives your business the opportunity of selecting which is more helpful.
Send Invoices Through Accounting Software
B2B Commerce platforms like Zoey can send order data to solutions like QuickBooks Online to manage invoicing and due dates, and in turn can receive the confirmation when payments are received.
Pros: If you use accounting software for other invoicing, it congregates it in one place. Allows the finance team to manage everything in a single location.
Cons: The web team may not have access to the accounting system for details on invoices. They will only see the final outcome within a system like Zoey when a payment is received.
Generate Invoices Inside the B2B Commerce Solution
Billing systems built into platforms like Zoey can generate invoices, which can allow for an online team to effectively be able to self-manage their customers. Invoices can be taken for partial or full payments depending on the scenario, and the dashboard shows which customers are up to date or paste due.
Pros: The web team can manage the entire journey from Sales Quote to order to Net Terms payment. Invoices can be collected and managed in the same system as other customer and order data.
Cons: The finance team may have an incomplete picture if invoices are managed outside their normal accounting software. Invoicing tools are generally more limited than a full accounting software package.
Regardless of Need, Zoey Can Help!
True flexibility for various business requirements is a rarity to find, but Zoey is the solution that ensures however you run your business, you can find the right approach for the job. See how flexible Zoey is by requesting a personalized demo based on your needs – click the button below to start a conversation with our Customer Success team!
