Why merchants should be cautious in providing online terms

Recently, there has been a lot of discussion about how the provision of trade credit in the form of net terms adversely affects businesses in general, especially small B2B businesses.Currently in the United States, according to Research from PYMNTS, American small businesses have 900 billion U.S. dollars in outstanding accounts receivable.

How did this happen? The lack of good funding options is an important reason for this situation. In the past, when buyers wanted to buy, merchants (sellers) were essentially forced to act as banks. Sellers of merchandise and merchandise do not want to go this way. They become lenders (extended trade credit, also called net terms), so buyers have the ability to buy their products.

In today’s online terms economy, in order to keep buyers buying from them, sellers attract buyers with terms of 30, 60, 90 days or more. This means that sellers have to wait for several months to receive payment, which leaves them no funds to reinvest in their business.

Actually, Research from PYMNTS and Fundbox in 2019 Show sellers stated that expanding trade credit “limits their ability to make capital expenditures (29.4%), expand production (27.2%), and purchase inventory (26.6%).”

The net-term economy itself is not flawed—and it’s very common.about 43% of B2B transactions Rely on trade credit.Indeed What keeps many companies competitive, Able to maintain a strong relationship with their best customers and increase customer loyalty.

It sounds pretty good. It is-when it is valid, it means when the buyer pays on time. How often does this happen? seldom.Research shows that almost all B2B (93%) are paid late At some time of the year.

Delay in payment is only one of the burdens faced by sellers who provide net terms.You can read more about 4 painful truths about providing online termsAt this time, the seller’s situation is so familiar, it’s easy to disagree, think it’s the status quo, and can’t do anything about it. But some things can be done. You can get rid of the vicious circle.You may need-if you want Grow your business, reduce your operating costs, and reduce the risks you face to buyers who never pay invoices.

Let’s see how to do this.

Cash flow problems inhibit growth

Sellers who extend the net deadline and have not received payment for several weeks or months are prone to cash flow problems. You may be familiar with how these issues can have a negative impact on your business, preventing you from:

• Recruit the required employees; pay competitive wages/bonuses
• Expand to new location
• Create a new marketing campaign
• Invest in R&D
• Open up new sales channels
• Pay for your product production
• Invest in new technology
• Reinvest in your business

For companies with cash flow problems, growth is much more difficult. Independent analysts have found that if they receive payment immediately and invest in strategic growth activities (such as expanding capacity, purchasing inventory in a timely manner, and/or investing in new products), B2B sellers can increase revenue by approximately 25% to 35% on average.

Increase in business costs

Business survival depends not only on income, but also on profitability, and profitability is usually lost in hidden ways, such as wasting human capital. In some small businesses, most employees wear many hats. They need to invest their time wisely and effectively in activities that generate sales and increase profit margins.

However, it may be more difficult to do this when key people in the company must also act as bankers. Companies that extend the net maturity must first spend time and money to assess the creditworthiness of buyers who need credit. Then, if the buyer delays the payment, they have to chase the money. This is a waste of time, diverting time and attention from more profitable tasks and responsibilities. Moreover, if they decide to hire a collection agency, they will not receive the full amount due – and they must pay for the collection service.

Then there are lost opportunities because the seller does not have the funds on hand to take advantage of the opportunity to be able to buy inventory quickly, order more goods from the factory, or qualify for early payment discounts from suppliers.

An independent analysis showed that the cost of managing a net-term plan would increase the total cost of business operations by an average of 8% to 10%. Therefore, if B2B companies can get rid of the Internet terms economy, operating costs can be reduced by up to 10%.

The risks of the Internet terminology economy

The problems we have solved—cash flow and higher operating costs—are common by-products of participating in the online clause economy. However, it not only costs you time and money, but also full of risks.

Small B2Bs compete with large B2Bs every day, which usually have stronger financial resources and can tolerate delayed payments (or non-payment).Larger companies can provide longer periods, while smaller companies are mostly unable to match and continue to operate.

If buyers completely default, small businesses may be hit hard, while large sellers will be more susceptible.

In addition, larger companies may have departments and departments whose employees are trained to assess creditworthiness or collect late payments. Salespeople who sell in smaller businesses often cannot establish close relationships with customers if they also pester them to pay. Generally speaking, for larger companies, the risk of extending the term is smaller than the risk of B2B.

However, if small businesses do not extend the net deadline, they risk losing customers completely because these customers can do business with large companies that sell the products they want and provide the terms they need.

According to Frost & Sullivan’s independent analysis in 2020, small and medium-sized enterprises lose approximately 6% to 8% in revenue due to delayed payments, payment defaults, and customer churn. When net terms are given, the possibility of non-payment and delayed payment increases. To avoid these situations, B2B sellers usually advertise shorter net deadlines, which put them at a disadvantage compared to larger competitors.

solution

Although some companies may find this trade-off very bleak, striking a balance does not need to be so expensive. Companies do not have to rely on old-fashioned credit solutions such as factoring, working capital loans and credit cards. The business credit line from Fundbox can provide business owners with financial breathing space, although the payment of accounts receivable is abnormal or delayed, they can still continue to operate.

Use business credit lines that can be based on received invoices, Provides the following possible advantages:

• Faster financing, so companies can get paid immediately after the work is completed.
• The ability to continue to provide net terms. As mentioned earlier, if the seller does not provide the net terms, the buyer will directly turn to the company that provides the net terms. But sellers need to be able to handle the risk of providing terms to customers.

If you want to focus on growing your business and devote your energy to doing what you do best, then it may be time to get rid of your part-time “banker” status and explore a solution so that you don’t have to worry about giving buyer’s credit. In the end, both your customers and your business will benefit.