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Get Paid Faster

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