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Why the Average Seller Should Care About Net Terms

By Rieva Lesonsky

net terms

There’s been a lot of talk lately about the Net Terms Economy—and how adversely it affects businesses in general and small B2Bs in particular. If you’re not familiar, the Net Terms  Economy refers to the fact that right now in the U.S., according to research from PYMNTS, American small businesses have $900 billion in outstanding receivables.

How did this happen? A lack of good funding options is a big part of what led to this situation. In the past when buyers wanted to make purchases, sellers were essentially forced to act as a bank. Sellers of goods and merchandise didn’t want to go down this path. They became lenders (extending trade credit, also known as net terms) so buyers could afford to purchase their products.

In today’s Net Terms Economy, in order to enable buyers to keep purchasing from them, sellers are enticing buyers with terms of 30, 60, 90 days or more. This means sellers are waiting months and months to get paid, leaving them without funds to reinvest in their own businesses.

In fact, 2019 research from PYMNTS and Fundbox shows that sellers say extending trade credit “constrains their abilities to make capital expenditures (29.4%), expand production (27.2%) and purchase inventory (26.6%).”

The Net Terms Economy is not inherently flawed—and it is common. About 43% of B2B transactions rely on trade credit. Indeed, it’s what keeps many businesses competitive, able to maintain solid relationships with their best clients, and increase customer loyalty.

Sounds good. And it is—when it works, meaning when buyers pay on time. How often does that happen? Not often. Research shows nearly all B2Bs (93%) have been paid late at some time during the year.

Late payments are just one of the burdens sellers who offer net terms face. You can read more about the 4 Painful Truths of Offering Net Terms. At this point, the situation is so familiar to sellers, it’s easy to just shrug it off, thinking it’s the status quo and there’s nothing you can do about it. But something can be done. You can escape the vicious cycle. And you may need to—if you want to grow your business, reduce your costs of doing business and lessen the risks you face from buyers who never pay their invoices.

Let’s look at how you can do this.

Cash Flow Issues Inhibit Growth

Sellers who extend net terms and aren’t paid for weeks or months can easily encounter cash flow problems. You’re likely familiar with how these issues can negatively impact your business prohibiting you from:

  • Hiring needed employees; paying competitive salaries/bonuses
  • Expanding to a new location
  • Creating new marketing campaigns
  • Investing in R&D
  • Opening new sales channels
  • Paying for production of your goods
  • Investing in new technologies
  • Reinvesting in your business in general

It’s much more difficult for businesses with cash flow problems to grow. Independent analysts found B2B sellers can, on average, increase revenues by approximately 25% to 35% if payments are received immediately and invested in strategic growth activities such as expanding production capacity, purchasing inventory in a timely manner, and/or investing in new product innovation.

Increased Cost of Doing Business

Business survival depends not just on revenue, but profitability, and profitability is often lost in hidden ways, like wasted human capital. In some small businesses, most employees wear many hats. They need to invest their time wisely and effectively in the activities that bring in sales while improving profit margins.

But it might be more difficult to do that when key company personnel have to act as bankers as well. Companies that extend net terms have to first spend time and money evaluating the creditworthiness of buyers who want credit. Then, if the buyers are late making payments, they have to chase down the money. This is a time suck, diverting time and attention from more profitable tasks and responsibilities. And if they decide to hire a collections agency, they’re not going to receive the full amount due them—plus they have to pay for the collection services.

Then there’s the lost opportunities because sellers don’t have the funds on hand to take advantage of being able to quickly purchase inventory, order more goods from their factories or qualify for early payment discounts from their suppliers.

An independent analysis shows the cost of managing a net terms program can add, on average, an estimated 8% to 10% to the total cost of business operations. So, if B2B companies can escape the Net Terms Economy, the cost of doing business could be reduced by up to 10%.

The Risks of the Net Terms Economy

The issues we’ve already addressed—cash flow and higher costs of doing business—are the usual byproducts of participating in the Net Terms Economy. But, it not only costs you time and money—it’s fraught with risks.

Smaller B2Bs are competing every day with their larger counterparts, who often have deeper pockets enabling them to endure late (or no) payments. Bigger companies can offer longer terms, which smaller businesses mostly simply cannot match and stay in business.

A small business could be devastated if their buyers default altogether, something larger sellers can more easily withstand.

Plus, larger businesses may have departments and divisions with employees trained to evaluate creditworthiness or collect delayed payments. The salesperson who makes the sale in a smaller business typically cannot build a close relationship with a customer if they’re also pestering them for payment. For bigger businesses, in general, extending terms is less risky than it is for smaller B2Bs.

But, if small businesses don’t extend net terms, they risk losing clients altogether, since those clients can do business with the larger companies that sell the products they want and offer the terms they need.

According to 2020 independent analysis from Frost & Sullivan, revenue losses from late payments, payment defaults, and customer churn range from approximately 6% to 8% for SMBs. And the probability of non-payments and late payments increases when net terms are given. To avoid these scenarios, B2B sellers often promote shorter-duration net terms, putting them at a disadvantage compared to their larger competitors.

Solutions

While some businesses may find this tradeoff pretty bleak, striking a balance doesn’t have to be so costly. Businesses no longer have to rely on old-school credit solutions, like factoring, working capital loans and credit cards. Now sellers can take advantage a next-generation credit and payments platform—one that independent analysts say offers:

  • Faster financing so businesses can get paid as soon as their work is completed.
  • Continued ability to offer net terms. As noted earlier, if sellers don’t offer net terms, buyers will simply move on to a company that does. But sellers need to be able to handle the risk of offering terms to customers.
  • Cost-effectiveness. If the solution is not more affordable than current solutions, why would buyers accept them?
  • Customization capabilities. A next-gen platform, realizing not all B2B sellers have the same needs, offers different models providing customized solutions. Whether that’s accepting upfront deposits, white- or grey-label options, ability to integrate with ERP or e-commerce platforms, any solution must be flexible enough to meet buyers’ various needs
  • Seamless payments experience. Sellers need solutions providing little or no friction in the credit and payments process, offering buyers a great user experience. That means being able to accept all payment methods, including checks, credit cards and ACH transfers.

This is not a theoretical wish list. Solutions like this exist today. An independent analysis reveals B2B sellers can get all this from Fundbox.

The Better Way to Address Trade Credit Needs

Fundbox Net Terms is a truly different next-generation experience. It takes a lot of the stress—and work off the sellers’ shoulders. The Fundbox solution enables sellers to extend net terms to their customers (for 30, 60 or 90 days, or a customized time period) without the hassle and risk of running an in-house credit and collections program and get paid quickly.

Fundbox does all the heavy lifting, powering your business credit program and taking responsibility for making the credit assessments and extending terms. At the end of the terms, the buyers pay Fundbox.

There are other advantages to the Fundbox Net Terms solution:

  • You’ll save money. Fundbox Net Terms costs less than credit card financing or factoring.
  • Fundbox Net Terms integrates with QuickBooks Online and are expected to soon work with other popular platforms, making it easy for sellers to send invoices, get paid quickly, and reconcile payments within their existing workflow.
  • Fundbox works whether you sell off- or on-line (or both). They offer an API, so your customers can checkout—with net terms—at the point-of-sale when they purchase from you online, if approved.
  • Since Fundbox may be able to offer your customers higher credit limits and longer terms, your buyers can place larger orders, giving them more time to sell their merchandise and giving you a higher average order value (AOV), if approved.
  • Sellers can increase their customer base. If they’ve never offered net terms previously, the Fundbox Net Terms solution allows them to do so. And if they have, since Fundbox assumes the risk, customers who might have been too risky to loan by the business can get credit from Fundbox, if approved.
  • The Fundbox Net Terms solution is easily customizable, so sellers can cater to the needs of their individual customers.
  • Perhaps most important, using Fundbox Net Terms will improve your cash flow. Sellers get paid as soon as the next business day/ quickly/ fast, allowing your approved buyers to get the funding they need, and giving you the cash to grow and take advantage of emerging opportunities. An independent analysis shows if you migrate to Fundbox Net Terms your annual revenues can increase, on average, by 25% to 30%.

If you want to focus on growing your business, devote your energies to doing what you do best, it may be time to free yourself from being a part time “banker” and explore a solution that takes the worry out of giving your buyers credit. In the end both your customers and your business will benefit.

In Partnership with Fundbox.

Business stock photo by Asier Romero/Shutterstock

 

New PPP Loans Available—How to Find a Lender

By Rieva Lesonsky

Fundbox coronavirus series, pt. 4, PPP Loans

Although the first round of relief funding from the Paycheck Protection Program (PPP) ran dry before many small businesses could even find an SBA-approved lender, a new law went into effect on April 27th that includes more than $310 billion for the Paycheck Protection Program. Nearly $60 billion of the additional PPP funding has been set aside for businesses that do not have established banking relationships, including rural and minority-owned companies.

The U.S. Chamber of Commerce suggests again invites small businesses to connect with a lender and apply for the PPP loan. Time is of the essences, because as during the first round of funding, these newly available funds will be disbursed on a first-come/first-served basis.

Finding a PPP Lender

Because the SBA and lenders now know more money will be coming, it’s a good idea to be ready as soon as the government gives the green light. Experts believe the new infusion of funds will go fast—as quickly as the first 48 hours.

If your business bank is not an approved SBA lender, you need to find a lender now. You can find a list of approved lenders on the sba.gov website by state or Fundbox can connect you to a lender and guide you through the process.

Applying for a PPP Loan

Next, gather the correct documentation for the application. Here is a list of the required PPP application documents:

  1. Basic information about your business and how to contact you
    2. Average monthly payroll costs
    3. Details of full-time employees and their payroll costs
    4. Applicable Tax Forms (for 2019 and Q1 2020, if available)
    5. Proof of mortgage or rent, mortgage interest, and utility expenses
    6. Articles of Incorporation/Organization
    7. Applicable forms to verify all ownership over 20%
    8. Each owner’s TIN, EIN, or SSN and copies of IDs for all 20%+ owners
    9. Email addresses for all 20%+ owners of the business
    10. Proof of Active and Good Standing status of the business
    11. The completed SBA PPP application form
    12. Electronic funds transfer information

How to Learn More About the PPP Application

For more details on how to complete the PPP loan application and how to find the required documents, please this complete PPP Checklist. For a description of the loan terms for the PPP, the SBA provides a summary here.

Fintech Companies Joining the Process

The SBA has been slow to include fintech companies as approved lenders, which was not helpful to smaller businesses, especially as some major banks have been accused of favoring their larger clients. Once the SBA finally gave a few fintech companies approval, the first round of funding ran out. However, now that additional PPP funding has been passed by Congress, it’s essential to get started now, and a fintech firm may be able to help you apply and connect you with a PPP partner bank.

Once the lender approves your application, it gets sent to the SBA for approval and then it’s time to cross your fingers and hope you get approved before the next round of funding is exhausted. If you are lucky enough to get approved, you will get notification (usually by email) to sign final agreements and then payment comes in about  five to seven days.

Disclaimer: This information has been aggregated from external sources. Fundbox and its affiliates do not provide financial, legal or accounting advice. This content has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own financial, legal or accounting advisors before engaging in any transaction.

PPP loan stock photo by Vitalii Vodolazskyi/Shutterstock

Revolutionizing Net Terms

By Rieva Lesonsky

net terms

Part 4 of a series on the Net Terms Economy

Remember the Beatles song Revolution? Let me remind you of some of the lyrics.

“You say you want a revolution.
Well, you know
We all want to change the world…
You say you got a real solution
Well, you know
We’d all love to see the plan

You ask me for a contribution
Well, you know
We’re all doing what we can.”

When it comes to all we’ve learned so far about net terms in parts 1-3 of the Get Paid Faster series, it seems a revolution is certainly in order. And we’d all “love to see the plan.”

First, a reminder of what we’re fighting for. According to our friends over at Fundbox, there’s approximately $3.1 trillion tied up in accounts receivable for all employer firms in the country. And there are only about six million companies with employees in the U.S.

We’ve talked about the hurdles in the previous articles in our series:

1—One of the challenges is to take as much risk out of assessment process as possible. How can sellers be better assured that buyers are credit-worthy? Is there a way to automate the process?

2—For the seller, getting paid quickly has always been an issue. The ideal would be for them to get paid as soon as the transaction is accepted. Can we accelerate the payment process?

3—The overall goal of the revolution is for sellers to sell more products, getting better terms from the buyers, increasing their average order value (AOV).

So how do we do it? How do we revolutionize net terms? By taking the heavy lifting and responsibilities away from both buyers and sellers and outsourcing them. Think of is as TaaS or “Terms as a Service.” So instead of both buyers and sellers bearing the heavy burden, outsourcing the terms programs removes the risk of credit default, enables sellers to sell to anyone and gives buyers more flexible terms and faster credit decisions.

Faster Payments & Access To Credit

Getting paid faster certainly tops most business’s most-wanted lists. Currently buyers, especially new ones, may have to wait a long time while the seller accesses the risk of extending terms to them. And after waiting, the seller may decide the risk is too great and denies the buyer terms. That’s cost everyone time and money.

But what happens when we get technology involved? A lot—and all of it is good for both B2B buyers and sellers. The solution, says Fundbox, is a new B2B e-commerce payment ecosystem. Within this ecosystem buyers would be able to get credit at the time of need—when they’re in the midst of making an online transaction.

This isn’t a future dream, this is reality. Fundbox says several new technologies have already emerged making it “possible to provide credit decisions and on-demand access to business credit in near real-time.” The technologies: data science, machine learning, and the ability to do business in the cloud have the ability to “fuel the rapid acceleration of B2B payments and credit.”

Let’s take a closer look at how these technologies can change the dynamics in the Net Terms Economy. Instead of the slower, laborious process of a seller accessing the risk of a buyer, machine learning allows sellers to make fast underwriting decisions, so quick, in fact, a seller can, says Fundbox, “extend financing from inside the checkout process, providing a better user experience with payment and credit options, contextualized at the point of need.”

As machine learning runs in the background it enables platforms to “connect to cloud-based transactional data. After a real-time analysis a credit decision can be made”—on the spot. This allows the B2B seller to get paid right away, freeing up capital that would have otherwise been off limit until the buyer paid it back.

The technology also enables the fintech (business capital) platforms to offer a “net 60” no-interest payment option during the online checkout process. And buyers may be able to extend their terms week-by-week (for up to a year) for a flat fee.

Buyer and Sellers are Unaware

The only way this works is if the e-commerce platforms and the business capital platforms work together so the buyers and sellers can get an immediate answer from the lending source. There is one hitch however—and it’s you small business owners. The Trade Credit Dilemma Report from PYMNTS.com reveals that while most business owners (54% of SMBs with less than $10 million in annual revenue) are “strongly enthusiastic” for these platforms, less than 14% of businesses surveyed currently use them. What’s worse—almost 20% of business owners are unaware these platforms even exist.

One of the reasons the survey respondents are excited about these new immediate payment platforms is they not only get paid quickly, but that enables them to turn around and buy supplies. The businesses found it particularly useful if this was a new relationship between buyer and seller. And most SMBs understand getting paid faster allows them to invest their time in the core parts of their businesses and spurs faster growth.

Net terms is not a new concept—it’s been around for hundreds and hundreds of years—which makes it ripe for a revolution. And now intelligent risk assessment and on-demand access to payments and business credit are revolutionizing the SMB marketplace as well.

Buyers and sellers had gotten complacent. Sellers were used to taking on the time-intensive task of assessing risk and giving trade credit to companies they had no history with and were accustomed to waiting weeks (or even months) for payments. While buyers knew they were likely to be stuck with payment terms at odds with their cash flow cycles.

In short, the system was broken and didn’t work for anyone. Getting paid immediately is a powerful and revolutionary concept—and it’s now a reality. The Net Terms Economy is being transformed, benefiting both B2B buyers and sellers and the national (and global) economies as well.

In partnership with Fundbox 

Crowd stock photo by Abscent/Shutterstock

The Buyer’s Dilemma: The Challenges of Accepting Net Terms

By Rieva Lesonsky

Part 3 of a 7-part series on the Net Terms Economy

As we’ve been discussing over the past several weeks, life in the Net Terms Economy is not an easy one—not for sellers—and certainly not for buyers. As we noted, according to Fundbox, a leading fintech company, there’s $3.1 trillion in outstanding invoices—essentially the money businesses owe one another—affecting small and mid-sized businesses (both buyers and sellers) and the overall economy.

This week let’s look at the buyer’s dilemma. So many B2B buyers, particularly small businesses, get stuck in a cycle of not having enough money on hand to buy the products/inventory they need. Often the reason they don’t have adequate cash is because their customers are late paying them, and they lack the resources and infrastructure of bigger businesses to chase down money owed to them.

This can put them in dire straits. They need money to buy inventory in order to make money selling it, so they set out on a money hunt. But, since they’re small, traditional sources of financing have not exactly been welcoming. It can be almost impossible to get a loan and lines of credit available to them are often too small to make a significant difference.

That’s life in the Net Terms Economy. Remember, the Net Terms Economy is just another way to refer to trade credit. Buyers are getting terms of 30, 60, 90 days—or more—from sellers. And as this white paper, The New Net Terms Economy states, “While this sounds like a win-win solution, trade credit can actually become a circular, never-ending cash flow problem for both buyers and sellers.”

The Cash Flow Crisis

Let’s face it—American businesses are in the midst of a cash flow crisis (as is much of the world). A PYMNTS report says 56.2% of U.S. businesses commonly experience a cash shortfall, which rises to 65.5% for younger, early-stage companies, which are obviously more vulnerable. (Cash flow problems are the main reason new businesses go out of business.)

Since traditional methods of don’t work for them, buyers with funding issues often turn to their suppliers for financing and have to go through the time-consuming process of convincing those sellers their business is credit-worthy and worth the risk of lending to them. And, in these situations, the sellers have to go through a time suck of their own, vetting buyers and deciding on the terms. Sellers usually have the upper hand here, and buyers are at their mercy, which can often lead to settling for less-than-ideal deals, such as non-negotiable payment terms.

The Struggle is Real

How bad is the cash flow crisis? Bad! A global study conducted by Intuit showed 61% of the companies surveyed said they struggle with cash flow, which can lead to lost business, the inability to pay vendors and employees, and loan defaults. In the past year alone, the Intuit survey found 42% of SMBs experienced cash flow issue, despite tax cuts and other regulatory policies designed to support the small business community.

In addition, the survey found 52% of SMBs have missed out on $10,000 because insufficient cash flow has forced them to turn down projects or sales. In the U.S., small firms lost an average of $43,394 because they turned down projects due to insufficient cash flow.

Buyers and sellers in the Net Terms Economy have a co-dependent relationship. Buyers need the products the sellers produce, and sellers need buyers to purchase their products, creating a vicious cycle. The Fundbox Working Capital Survey says, “Firms with cashflow problems are more likely to offer discounts to buyers and receive them from suppliers.” In fact, “53.6% of companies that receive more than half of their payments late receive 5% plus discounts, and 57.5% percent extend them to their suppliers.” Nearly 72% of businesses struggling with cashflow issues are so eager to buy products, they “agree to discounts of 3% or more from their suppliers. This all makes it harder to ever catch up.

Early-stage companies are particularly impacted. They routine­ly experience cash shortfalls that require short-term funding at nearly twice the rate of established companies. These companies not only experience fewer cash shortfalls, but also have greater access to the financing products that can mitigate them. Financial institutions are more likely to ex­tend favorable credit terms to established companies, thanks to their healthy balance sheets. They also have access to other financial products, such as credit cards, lines of credit and merchant credit advances, which all helps them better manage their cash flow.

Even when newer businesses do have access to financial products, they usually have to pay a higher price for them.

The future gets brighter

For the first three parts of this series, we’ve focused on the problems small business face getting paid. It has, at times, seemed a bit dire. Those were the challenges, now we’re going to move on to offering solutions, such as how to get paid quicker, which will improve your cash flow—and your bottom line.

As we mentioned before, we’re going to take a look at immediate payment platforms, through which invoices are paid by third parties and fees are incurred if balances are revolved after 30 days. These platforms are a boon to both established and emerging businesses.

Next up: We’ll look at revolutionizing the Net Terms Economy

In partnership with Fundbox

 

The Challenges of Offering Net Terms

By Rieva Lesonsky

net terms

Part 2 of a 7-part series on the Net Terms Economy

 

Last week we took a 30,000 foot view of the Net Terms Economy and saw how both buyers and sellers in the B2B world are facing tough challenges. Now, let’s come down to earth a bit, and look at the plights of sellers in this new economic reality.

First, a quick review. Fundbox, a leading fintech company, says one of the biggest challenges of the Net Terms Economy is it leaves $3.1 trillion in outstanding invoices on the table. This is an untenable situation, both for businesses and the national and global economy.

While this situation negatively affects all businesses, this can be particularly challenging for B2B companies. In this article, we’re going to look at the plight of sellers who, too often, have taken on the role of lending institutions, having to extend credit to buyers and the challenges they face as a result.

Why Sellers Act as Banks

Since a seller’s primary function in the business chain is to sell their wares, why are they even venturing into the business of loaning money? Mostly, they’re not doing it by choice. Rather, they got involved in the lending game so they can sell more products and increase their sales from buyers who wouldn’t ordinarily be able to afford the goods. As I explained in part one of this series, Are You Tired of Waiting to Get Paid?, trade credit, otherwise known as net terms, is how most businesses operate these days. Sellers offer buyers terms of 30, 60, 90 or more days, and then the sellers often wait months and months to get paid.

This can be especially hard on sellers. According to a survey conducted by PYMNTS and Fundbox, close to one-third of companies that offer trade credit say it hurts their cash flow making  their day-to-day operations more difficult. Nearly 30% (29.4% to be exact) say it “constrains their abilities to make capital expenditures, expand production (27.2%) and purchase inventory (26.6%).”

The process is also a time suck. It diverts their resources. Instead of focusing on running their businesses, sellers have to spend time evaluating the credit-worthiness of the buyers who need additional funds to purchase products. They take on the risk of a potential buyer default, something that their business was not intentionally designed to support. And then, more often than not, they have to spend even more time trying to chase down late payments. The study shows this is even harder on smaller companies that say offering trade credit prohibits them from being able to quickly purchase additional inventory because their money is tied up.  And, regardless of qualifying a buyer for net terms and the agreement to pay on time, at the end of the day, sellers are still hurt by offering net terms because it locks up their cash flow that could be used to accelerate growth.

Late Payments

Getting paid late can initiate a vicious cycle. Not only can this create an uncomfortable relationship between sellers and buyers, but a report from PYMNTS reveals 13.2% of buyers pay their suppli­ers late on average, while 27.5% of the businesses that frequently got paid late, were then late paying their own bills. This in turn affects a seller’s cash flow, as they start incurring fees for late or missed payments.

Even worse, when you’re unsure how much money you’ll actually receive from outstanding invoices, it frequently inhibits companies from making necessary monetary investments in their infrastructure, technology and more. The PYMNTS report notes, “Making business decisions and budgeting is trickier combined with cash flow constraints, especially when you’re not sure when the funds will be in the bank. This is where late payments start taking a severe toll on the success of your business.”

Ironically, the more generous the terms offered by sellers, the more likely they are to be paid late. The sellers offering payment terms between two and three months are paid late more than one-third of the time.

Even more startling, the PYMNT report reveals, “Com­panies that get paid late more than 75% of the time offer dis­counts of 5.7% on average, which is significantly higher than those offered by firms that are paid late only 10% of the time.” That’s leaving a lot of money on the table.

The worst-case scenario: 67.9% of the companies that receive more than 50% of their payments late experience frequent or routine cash-flow problems.

The larger the company, the deeper the damage: Almost 55% of companies with 500-plus buyers receive more than 25% of their payments late, while more than 72% of those with fewer than 35 clients receive over 75% of their payments on time.

But getting paid late is not the only challenge sellers living in the Net Terms Economy face. The whole process turns these businesses into financiers or “banks.” Now, in addition to doing their actual jobs, they need to dedicate time, personnel, and money into determining another company’s creditworthiness and moni­toring and enforcing their agreements.

How do they do that? The PYMNTS report shows: 26% rely on third-party credit reports to determine whether to extend credit to busi­ness partners, 13.5% consider time in business, 13.2% look at individual references, 11.8% do informal web and social media searches and 11.1% take personal relationships into consideration. That doesn’t sound like a reliable solution.  And given how often buyers are paying late, it’s obviously not.

Compounding the problem, according to the report, sellers try to incentivize buyers to pay up by offering enticements, such as extended terms and early payment dis­counts (those paid late more than 75% of the time offer average dis­counts of 5.7%), but instead of alleviating the problems, these prac­tices often perpetuate them.

This just increases the financial burden on sellers that may already be cash-strapped and facing cash flow issues. PYMNTS research indicates the average amounts to 4% of annual revenues. This translates to $317,000 a year for a firm taking in $11 million annually. Thus, businesses with lim­ited options fall into the late payments trap and struggle to dig themselves out.

How is this sustainable? The obvious answer is—it’s not.

There are solutions out there—the obvious one is to get paid quicker. As we continue this series, we’ll explore those solutions—we’ll look at immediate payment platforms, through which invoices are paid by third parties and fees are incurred if balances are revolved after 30 days. These platforms would help both establish and emerging businesses. They would free up time, money and other resources better put to other use.

Next up: we’ll look at the challenges faced by buyers living in a Net Terms Economy.

In partnership with Fundbox 

 Shutterstock photo of files by Olivier Le Moal

Are You Tired of Waiting to Get Paid?

By Rieva Lesonsky

paid

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