4 painful truths about providing online terms
4 painful truths about providing online terms
For many companies, the practice of providing trade credit to commercial customers is considered a necessary cost of conducting business. Sellers usually provide credit on net terms-depending on the industry, this may be called payment terms, dating terms, trade credit, business credit, or customer credit. This allows buyers to buy now and pay later, usually 30, 60, or 90 days (or up to a year in extreme cases) before the payment is due.
It is an intelligent system at work.In fact, usually 43% of B2B transactions Rely on trade credit financing. If you are such a business, it can help you stay competitive, maintain good relationships with your best customers, and increase loyalty and referral rates.
However, it can only really work if your customers pay on time. Many people don’t.A survey found that 93% of B2B companies received Late payment At some time of the year. other Research Indicates that as the number of your customers increases, your risk of receiving delayed payments usually increases. Among those with more than 500 buyers, nearly 55% reported that their payments were delayed by more than 25%.
Delay in payment is just one of the burdens you face in providing net terms. There are actually other hidden costs behind this “cost of doing business”. Read on to learn about the four major disadvantages of financing your trade credit program.
1. Delays in cash flow hinder growth
By providing trade credit, you may be exposed to cash flow risks. Even in the best-case scenario—when customers pay in time at the end of their tenure—your company must still bear operating debt for supply, labor, and other administrative expenses during this time. This risk becomes more complicated when you face the increased costs of undertaking new business, such as requiring you to hire expert staff, advanced equipment or high-quality materials before you start a new job.
When customers delay payment, cash flow becomes more difficult to manage. Fund Box Research It was found that 64% of SMB payments were delayed. As a result, 23% were unable to invest in new equipment or hire new employees, and 17% were unable to build inventory.3 This is why delayed payments make it difficult for B2B sellers to invest in strategic growth plans.
Such cash flow issues may also cause you to delay paying your own bills, or even pay bills to upstream suppliers, and may damage these critical relationships. A 2019 study by PYMNTS found that of companies that delayed more than 75% of customer payments, 27.5% of companies also delayed payments to suppliers, while nearly 68% of companies that received more than half of late payments often faced short-term funding. problem.2
If enough customers delay payment or default, you may be forced to seek external resources to fund your operations (such as credit cards), which will increase your costs. In this case, you are actually just paying for the debts incurred by the customer for the convenience of net payment.
2. Early payment discounts and small profits
Delay in payment is not the only risk of cash flow. If you use discounts to encourage customers to pay before Net-30 or any established terms, you may also lose money. Although it is good to get paid “early”, if they accept your offer, you will actually make even less profit.
To speed up cash flow, you leave money on the table so that your customers can enjoy trade credit. Even if the percentage is small, these incentives add up very well. PYMNTS research shows that The total discounts in the U.S. will reach 1.7 trillion U.S. dollars If every company offers an average interest rate of 4.1%, then every year. “
In addition to reducing the accuracy of the revenue plan, you must also track which accounts owe how much money based on a specific discount plan and payment timing, which complicates the accounting process.
3. You should not act like a financial company
By providing the net terms, your company assumes the responsibilities of the de facto financial company. 60% of small businesses rely on trade credit (Formal or informal), making net terms the second most common form of financing for small businesses (after traditional financial institutions).
Just because it is so common, it will not reduce your accounting department’s requirements for trade credit. First, they must determine which customers are creditworthy enough to provide net terms. This usually involves requesting a credit application, Run a credit check, Request financial information or tax documents, talk to recommenders, perform other due diligence and follow up.
Assuming the application is approved, you must negotiate and write down the application Credit policy (Your invoice terms and conditions). Usually this is not a simple prototype process. For example, “Net 30” usually means different things to different people. Does it start with the service or delivery date, the issuance of an invoice, or the receipt of an invoice? Do you offer discount terms as an incentive to pay in advance? According to what timetable? Do you charge interest, what is the interest rate, and when will it start?
Even the credit application process can strain relationships with key customers, who sometimes expect personal favors. Large customers may try to use their purchasing power to put pressure on you to agree to more favorable terms, relaxed rules or exceptions.
Remember: if you don’t have dedicated resources to manage the management tasks of your net-term plan, this means that these very important credit financing functions are performed part-time by employees (who may lack any professional training) or business owners.
4. Sometimes customers just don’t pay
Of course, the biggest risk of providing net terms is that you may complete the work or deliver the goods, but you will never get paid. No matter how hard you try to vet your customers before offering trade credit, you may be unlucky.
In addition to the pain that you or your employees may face when facing late payment (not to mention default) customers (which may be customers you have known for many years), handling such situations also involves significant costs and other risks.
First, you can hardly ask for immediate payment. Disputes may involve mediation and even potential litigation costs. You also face the possibility of losing customers.
collect This is also a highly regulated process. If you operate improperly without training, your company may face severe fines or legal penalties.This Fair Debt Collection Act (FDCPA) restricts what debt collectors can do when collecting certain types of debt. Some state laws also provide additional protections for borrowers.
If the customer can’t or don’t want to pay, you usually have only two equally bad options: hire a collection agency (and absorb their fees) or write off the balance as a bad debt. Debt collection requires time and money, so you may find that spending too much time collecting debt is not worth it.
In order to predict or avoid potential cash flow problems, it is helpful to pay close attention to customers’ compliance with the credit policy terms.One way is to review regularly Aging of accounts receivableGenerally, the longer the invoice is unpaid, the more likely it is that you will have difficulty recovering the full amount.5
Finally, although you may value a particular customer relationship, you should ask yourself if you are willing to consider abandoning customers who fail to pay on time.
Is it still worth it to provide net terms?
Despite the complexity, there are many reasons why providing net terms is of great commercial importance to organizations of any size. First, it is often difficult for SMEs to obtain other types of traditional financing from companies like yours for goods they may need. Trade credit provides a way for these customers to buy from you-usually larger orders-so they can sell for a longer period of time. Trade credit can also help you complete transactions and gain a competitive advantage. In addition, it can also build customer relationships and loyalty.
You can help minimize the impact of providing net terms on cash flow by considering the Fundbox business credit line, which allows you to withdraw cash based on the expected revenue of your customers’ unpaid invoices.
Disclaimer: Fundbox and its affiliates do not provide financial, legal or accounting advice. This material is for reference only and is not intended to be provided and should not be used as a basis for financial, legal or accounting advice. You should consult your financial, legal or accounting advisers before making any transactions.
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