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The Pros and Cons of Net Payment Terms

For anyone who deals in business-to-business (B2B) sales, it is a common fact that customers want net payment terms, and vendors are hesitant to give them. Customers enjoy net payment terms as it gives them more time to pay for merchandise, however vendors can also benefit from net payment terms as offering them can lead to larger and more frequent orders. Let’s take a look at both the pros and cons of offering net payment terms to better understand how they work and how the cons can easily be avoided.

What are the Pros of Net Payment Terms?

From a customer’s point of view, it is always better to have more time to pay for merchandise. Just like the old saying, I’ll gladly pay you tomorrow for a hamburger today, having time to pay for merchandise makes it much easier to afford it. This is especially true since most wholesale orders are for large dollar amounts, and a retailer simply may not have the money to pay for it up front. Of course, most retailers are looking past tomorrow and instead towards next month as typical payment terms in the retail world are net 30 days. However, some customers may want even longer, it is not uncommon for customers to request 45, 60, or 90 days, and in some seasonal industries they may even request longer. The reason behind this is that it gives them time to sell the merchandise to their customers so that they have the funds to pay for it in the first place.

Of course, many vendors seem to think that by taking a credit card that they are giving their customers time to pay. While it is true that you have time to pay for merchandise charged to a credit card, the idea is somewhat problematic. For one, you don’t know how much time they will have, there is a big difference between placing a charge at the beginning or at the end of a billing cycle. Then you have the fact that if a customer is unable to pay a credit card in full by the due date, they will be hit with late fees and interest charges. In general, it is understood that if you pay an invoice with net payment terms a few days late every now and then, there won’t be any financial repercussions. A customer can even request net 30-60-90 day terms, which allows them to pay an invoice in three installments, its basically the business equivalent of consumer financing.

Another benefit of net payment terms is that customers receive a higher overall credit limit. While a vendor may be reluctant to give a customer as high a credit limit as Visa or MasterCard, the credit limit they assign to a customer is only for that one vendor. With credit cards, the credit limit is shared across all the different vendors that a customer buys from. So even if a credit card is willing to offer double the credit limit that a vendor would offer, if they are using that card to purchase from 10 different vendors, then really they are only getting 20% of the credit limit that they would have received if they were given net payment terms. Of course, to make matters worse, your customers probably also use their credit cards to purchase office supplies, pay travel expenses, and even pay for lunch. In some cases, the sale may even be lost if a customer has already maxed out their credit cards.

Finally, offering net payment terms is a sales tool. Your customers don’t have to use it, but simply offering it to them is a selling point. Furniture stores and car dealerships offer financing to their customers, although their customers are under no obligation to use it, yet it is a major selling point for consumers that want to take advantage of the available financing. Even consumers who planned on paying cash may decide to purchase additional furniture or pay for upgrades on their car if they are being offered an attractive financing deal. The same is true in the world of wholesale, simply offering net payment terms doesn’t mean that your customers need to take advantage of it, but it is a major selling point for those who do. Knowing that they won’t have to worry about paying a credit card bill on time, or maxing out the card, can lead to larger orders. And just like with consumers who get financing from a furniture store, offering net payment terms helps build customer loyalty. A customer can pay any vendor with a credit card, so requiring a credit card means that a customer is likely to shop around for the best deal each time they need to bring in more merchandise. However, customers are much more likely to place reorders from a vendor who offers them net payment terms and they have created a relationship with.

What are the Cons of Net Payment Terms?

From a customer’s point of view, there really are no cons to net payment terms, they are being offered more time to pay, although they always have the right to pay earlier should they prefer to. The cons of net payment terms are only on the vendor’s side, although all of them can be easily avoided.

Perhaps the biggest negative for a vendor is having to wait 30 days or longer to get paid for merchandise. Just as it benefits the customer to have more time to pay, waiting longer to get paid hurts the vendor and strains their cash flow. The easy solution to this problem is to factor the invoices. With accounts receivable factoring, the vendor gets paid the same day that they ship to their customers, and the fee for doing so is no more than the processing fee they would have to pay if they took a credit card when the order was placed.

Another negative is having to deal with determining a customer’s creditworthiness and credit limit. It can be prohibitively expensive to subscribe to credit rating agencies, especially if you are only pulling a small number of reports as the agencies tend to give price breaks to companies purchasing large quantities of reports. Furthermore, you need to be able to understand how to read the reports and determine a proper credit limit. Once again, this is a problem that is easily solved through accounts receivable factoring. Factoring companies will handle all the credit checking for you. For one, they have many other clients who probably already sell to your customers so have already established a good relationship with them. For customers they aren’t familiar with, not only do they tend to get better pricing from credit rating agencies, but they are able to spread out their costs of pulling reports across all of their clients making it much more cost effective. Finally, they are very well versed in reading credit reports and establishing appropriate credit limits for your customers.

This last con brings us to our next con, and that is the issue of what if a customer doesn’t pay. While you can pull credit reports and do all your due diligence, unfortunately, at the end of the day no one has a crystal ball. It is possible that a customer who owes you money can go bankrupt or out of business, in this situation you are simply not going to get paid. However, once again this is something that can be avoided with accounts receivable factoring. If your factoring company offers non-recourse factoring, then that means they fully insure your receivables against non-payment. In a situation like this, you still get to keep the money they funded you.

Finally, there is the issue of collections. If you are going to give another business credit, you need to be able to collect from them. This means sending out account statements and even making phone calls to ensure that they pay their bills. While it would be nice if everyone would simply pay their bills when they become do, and many of your customers will, unfortunately this isn’t always the case and many businesses need to be reminded that it is time to make their payment. Once again, if this isn’t something that you are comfortable doing, with accounts receivable factoring, your factoring company will handle all of the collection work for you.

Is It Time to Start Offering Net Payment Terms?

Clearly the pros of offering net payment terms outweigh the cons, especially since the cons can easily be eliminated through accounts receivable factoring. If you don’t currently offer net payment terms, now may be the time to consider offering them. That doesn’t mean that you can’t still take a credit card if that is how a customer wants to pay, it simply means that you can give your customers another payment option. You can think of it as just one more sales tool, just like how car manufacturers advertise financing deals, although a consumer can still pay cash for a car if they prefer.

Accounts receivable factoring is simple, and is a form of debt-free financing. Since you are selling your receivables to a factoring company, you aren’t taking on any debt and it is your customers who are responsible for paying back your factoring company. The fees associated with factoring are similar to credit card processing fees, which means that the fees are already built into your pricing and won’t affect your bottom line. Plus, by working with a flexible factoring company that doesn’t require you to factor all of your accounts, customers that wish to pay with credit card can continue to do so, while those that want payment terms can receive them. With factoring you have nothing lose, and the benefit is happier customers and increased sales.

Want to start factoring today, give DSA Factors a call today at 773-248-9000, email us at info@dsafactors.com, or chat with us right here on this website. Our program has no minimum requirements, we don’t require you to factor all of your accounts, and we don’t require you to sign a long-term contract. We are a family owned business that has been factoring since 1986, so give us a call today and have happier customers tomorrow!

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