Obviously, all businesses want to get paid quickly, but that’s not the world we’re living in. Instead, welcome to the Net Terms Economy.
Part 1 of a 7-part series on the Net Terms Economy
It may not be the place most business owners want to live—but these days we have little choice. We’re living in a “buy now, pay later” environment, which can negatively impact your business, your industry, and the nation’s economy.
What is the Net Terms Economy?
The Net Terms Economy consists of businesses like yours and mine waiting—and waiting—to get paid for products we’ve already sold or work we’ve already completed. My friends at Fundbox say there’s a “massive $3.1 trillion” in outstanding invoices “held in suspended animation” while business owners are scrambling to pay their bills—and their employees.
B2B businesses are particularly impacted by the Net Terms Economy. Things are more clear cut in the B2C world—a consumer buys something using cash, or a credit/debit card and the retailer gets paid quickly in exchange for a small service fee.
In the B2B world, it’s not quite that simple. Trade credit—aka net terms—is the law of the land. With net terms of 30 (getting rarer these days), 60, 90 or more days, sellers typically wait months to get paid. And buyers, who need to purchase inventory, supplies or raw materials to operate their businesses constantly have to prove their credit-worthiness to sellers. Often, these buyers are stuck—forced into accepting non-negotiable payment terms.
How Did We Get Here?
These circumstances serve no one well—as Fundbox puts it, “Both sellers and buyers often wind up cash-starved and growth-challenged, with funds hanging in accounts receivable limbo.” In other words, both sides in the B2B transaction can easily wind up with cash flow problems—and nothing will shut a business down faster than that.
And this—buyers requesting net terms from sellers, who are then forced into the risk assessment business (which is labor-intensive, taking time away from more productive tasks) and still end up waiting to get paid—created, according to PYMNTS, the Net Terms Economy.
The slow, inefficient process doesn’t end there. What if, after the time-consuming task of assessing buyers, sellers determine the risk is too high and deny them terms? Or the seller doesn’t correctly assess the risk of loaning to the buyer, and the buyer doesn’t pay? Lastly, what if the terms offered are too onerous for the buyer to accept?
A lot of the risk goes undiagnosed—affecting buyers and sellers. Buyers can’t grow because they can’t get goods to sell and sellers can’t grow because so much of their capital is tied up in receivables. You end up with both buyers and sellers having wasted valuable time, opportunities and resources.
The SMB Receivables Gap
PYMNTS and Fundbox conducted an extensive study of the Net Terms Economy—and the reasons that caused it, labeling the problem the SMB Receivables Gap. The research showed all firms, regardless of time in business or profitability, faced challenges negotiating the Net Terms Economy. But startups, other early-stage businesses and those with thin profit margins were particularly affected.
More established companies were better able to navigate the Net Terms Economy using credit cards or lines of credit. Ironically, however, the research also showed high-margin businesses (defined as being in business 11 or more years, with margins between 25%-75%) were actually more likely to be paid late, because they tend to extend more generous payment terms, leading to longer AP terms for these businesses—on average 40.3 days, compared to 25.6 days for early-stage, low-margin companies.
Why Does the Net Terms Economy Still Exist?
In addition to the time and complexity of operating a credit program, businesses that extend credit also face the risk of customers paying late or not at all and having too much money locked up in accounts receivable.
If extending terms is so wasteful, why do businesses do it? Over half (54.8%) of high-margin firms say extending credit helps them attract new customers. And the lure of the status quo—the concept of, “but we’ve always done it this way” is powerful.
The SMB Receivables Gap underscores the challenges businesses face today and the desperate need for solutions. The good news is these solutions exist in the form of immediate payment platforms (where invoices are paid by third parties). The report says, “Such platforms would help create a more level playing field between established firms and the younger businesses still gaining their footing. [And] they would help companies avoid the risks involved in extending credit so they can instead focus on their core business operations.” They would help business owners more knowledgeably be able to predict cash flow.
The biggest benefit? Imagine how better off we, the small business owners and the backbone of Main Street, would be if $3.1 trillion were unleashed into our economy.
Chances are, if you’re a B2B, you’re caught in this vicious cycle. We want to help. Over the course of the next two months, we’ll be looking at the specific challenges of living in the Net Terms Economy and then offer recommendations and real solutions for how business sellers can use net terms and faster payments to increase their average order volumes (AOV) while business buyers can leverage new net terms offerings to order to gain faster access to credit and more flexible payment terms. When we’re done, hopefully you’ll not only know how to better navigate your way through the Net Terms Economy, but your business will be in a better position to ensure future success.
In partnership with Fundbox.
Payment terms image from Shutterstock by Constantin Stanciu