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.
Understanding Net Terms
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.
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 - in a nutshell, Buy Now, Pay Later. 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 also Buy Now, Pay Later, 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.
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. Fundbox, a Zoey partner, offers merchants the ability to offer Net Terms to their customers and manage collection of payment, while guaranteeing a merchant will get paid right away. Resolve effectively takes on the risk and payment collection aspects of it, and charges a predictable fee for the benefit of doing so.
Learn More About Fundbox
To learn more about how you can get assistance with managing Net Terms for your business, click the button below to visit their app page:
Zoey is a powerful eCommerce solution for B2B and wholesale businesses. It also leverages B2C-type capabilities to empower merchants to let their customers self-serve common needs like reordering, order status and account maintenance. Zoey has many enterprise-grade B2B and wholesale capabilities built into its platform for easy establishment and growth of a B2B business.