What are net terms?
How do net terms work?
One late invoice can put a small business’ finances in jeopardy. Delinquent payments from customers and slow periods can drastically reduce a company’s cash flow. As a result, they can lack the funds required to purchase the inventory and supplies they need.
Thankfully, trade credit, or ‘net terms’, gives businesses a flexible financing option when they are short on cash. Vendors and suppliers will front businesses with vital inventory and defer payment for a set period. This way, small businesses don’t need to delay essential inventory purchases, while B2B merchants can close more deals in an increasingly competitive market.
How do businesses benefit from net terms?
Many small business owners struggle to secure credit from financial institutions. Credit issuers will require applicants to meet strict criteria and will run checks on the owner’s personal credit score.
Businesses may also seek funding from other sources because of the need to provide collateral or complete a lengthy application process.
Net terms offer a simpler alternative. Suppliers can extend credit to businesses following a short trade credit application process. This means companies can get the goods they need to operate when they need them, and can wait for a certain period before payment becomes due.
Offering net terms can also be beneficial for suppliers. It can give them a competitive edge to secure new clients, build relationships, and grow business with SMBs that find it difficult to fund their purchases by other means. This financing option can also help to maintain profitability by cutting out processing fees associated with credit card payments.
What are common payment terms?
Suppliers that extend net terms to their customers typically give them between 30 to 120 days to make full payment. However, the net terms can vary depending on the seller and industry. Some allow as few as seven days or as many as 180 days.
The most common net terms are Net 30 (30 days until full payment is due), Net 60 (60 days until full payment is due), and Net 90 (90 days until full payment is due). It’s important that businesses check the payment terms of a trade credit agreement and ensure that this allows them enough time to accrue the funds for full payment.
To encourage early payment, many vendors offer discounts to businesses that settle their invoices before the due date. These are often a small percentage deduction off the full amount due and can end up saving businesses a significant amount in the long term.
Are there any risks to using net terms?
While there can be advantages to settling invoices with suppliers early, businesses can also be penalized for making late payments. Again, these late fees tend to be a certain percentage of the total cost and added as interest for failure to meet the payment terms.
Defaulting on net terms can also harm relationships with existing suppliers. It can make it challenging to secure relationships with suppliers in the future. Major credit bureaus, including Dun & Bradstreet, Experian, and Equifax, all take a business’ payment history into account when calculating their business credit score.
Delinquent payments can lead to a lower score, representing a higher financial risk. A lower business credit score can also make it more challenging to borrow from credit providers.
Businesses should ensure they are ordering efficiently from suppliers to take full advantage of net terms. Having available cash reserves will also allow companies to take advantage of discounts for early payments and clear debts with suppliers should business growth slow.
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