Things to Consider When Offering Net Terms to B2B Buyers

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

If you’re not familiar with the idea of Net Terms, it’s a pretty simple idea. 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 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’s the fact that many invoices are simply not paid on time. A survey conducted in 2014 reported:

  • Nearly 40% of invoices were paid late
  • Only half of businesses checked the creditworthiness of their customers before extending terms
  • The average term length was 4 weeks, but the average payment was made in 7 weeks
  • Half of invoices that were 90 days late in the Americas were written off; one-third of invoices 90 days late in Europe were written off.

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.

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