How Net Terms as a Service Help Vendors and Buyers Thrive
Managing buy and sell cycles is getting trickier as the economy continues to battle downward pressure. Interest rate hikes and the rising cost of finance make it more difficult for vendors to offer flexible terms. Formerly relaxed credit terms have tightened considerably, and buyers are feeling the effects of less repayment flexibility.
As conditions tighten, buyers and sellers must pay more attention to term arrangements in their invoices. While extending terms to 30, 60, or 90 days is still possible, it’s often reserved for larger organizations with some play in their cash flow. Small business owners and startups may need to seek new ways to get what they need.
Today, we’ll look at net payment terms and explore alternatives to the traditional net term agreements buyers formerly relied upon.
- What are net 30/60/90 terms?
- How does a net terms agreement work?
- What are the pros and cons of extended net terms?
- Do vendors have recourse when buyers default on traditional net terms?
- Are there good alternatives to extended net terms?
- How do net terms as a service work?
By the end of this article, you’ll have all the information you need to negotiate purchases that benefit both parties without putting a strain on cash reserves.
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What are net 30/60/90 terms?
Net 30/60/90 terms are a type of business credit that offers an extended repayment agreement. Net 30 is one of the most common payment terms, requiring the buyer to pay within 30 calendar days of the invoice due date. Net 60 and 90 agreements extend the payment time to 60 and 90 days, respectively.
Extended terms help maintain strong business relationships between buyers and sellers. They benefit buyers by allowing them to purchase goods or services without paying immediately, and they assure vendors that the client will pay on time.
How does a net terms payment agreement work?
A net 30 payment term allows customers to purchase goods or services from a vendor without paying upfront. Instead, customers receive an invoice that they must pay within 30 days. This gives them more time than a due-on-receipt invoice and assures vendors of payment within a specific timeframe.
However, there are some potential drawbacks to using net 30 terms. While the flexibility of net 30 attracts buyers, it introduces a higher level of risk for vendors. Vendors offering extended terms may strain their cash flow since the product is removed from inventory well before payment. And since vendors must write off the loss if the buyer doesn’t repay, they should be selective in extending net 30 terms only to low-risk or established customers with a solid repayment record.
What are the pros and cons of net 60 or net 90 terms?
Longer net terms make it easier for companies making purchases to balance their cash flow, especially with larger expenses. This increased flexibility creates more opportunities for these businesses to leverage their working capital to stimulate growth. It also allows them to do so without incurring interest or fees on short-term debt.
Because extended net terms can remove the normal constraints of loan payments, interest, or fees, they help encourage buyers to commit to big-ticket purchases. This makes it easier for vendors of equipment or expensive products to close deals. As with shorter terms, vendors should consider a buyer’s creditworthiness when granting longer terms.
Vendors may also want to consider offering an early payment discount as an incentive to encourage buyers to pay in advance of the invoice due date. Early pay discounts often save buyers up to 5 percent — enough to be enticing, improve customer loyalty, and help sellers stave off late payments.
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What recourse does a vendor have in cases of non-payment?
With increasing credit costs and economic troubles rising, over half of invoiced B2B transactions are overdue. Vendors may access one or more remedies when a buyer defaults on net terms. Generally, vendors may attempt to collect unpaid debts through letters or calls demanding payment. They may also seek legal relief or terminate services.
Termination: If the agreement is part of a contract, the vendor may be able to end the services agreement due to non-payment. To ensure this option, a clause in the contract must outline acceptable remedies, penalties, and outcomes of non-payment. Vendors must be proactive in chasing payments and taking steps towards collecting debt as soon as possible, as most jurisdictions have time limits on collections and filing lawsuits to enforce outstanding debts.
Debt collection: A debt collection agency is a third-party company that specializes in recovering payments from delinquent accounts. These agencies use a variety of tactics to collect on debts, such as making phone calls and sending emails or letters demanding payment. If necessary, they will perform research to locate the debtor and may advise on legal proceedings for debt recovery.
Factoring: Factoring is a financial service where vendors sell their accounts receivable (invoices) to third-party lenders at a discounted rate. The lender then collects the payments from the buyers on behalf of the vendor. This is a good option for vendors that don't want to pursue lengthy collection processes or legal action against buyers who are in default.
Factoring can be an effective solution as it allows vendors to receive payment immediately, even if they have yet to collect from their buyers. In some cases, vendors sell invoices to factoring companies during invoice processing to stimulate immediate cash flow.
Credit reporting: As with private credit, businesses have a credit bureau score that reflects their credit activity, repayment history, and number of days past due in cases of non-payment. Reporting to a credit bureau can help vendors register non-payment and make the credit landscape safer for their interests and other businesses. Thus, a credit check is an important part of a vendor's or lender's due diligence process, as it helps reveal a buyer’s credit risk when considering an extended terms offer. While credit reporting can’t directly help recover unpaid balances, it may incentivize the buyer to keep the account current.
Alternatives to standard net terms agreements
For situations where a buyer isn’t positioned to get extended net terms or the vendor isn't prepared to extend them, there are other options.
Invoice factoring: In invoice factoring, the vendor sells unpaid invoices to a factoring company to get immediate payment for goods or services.
Advance payments: Sometimes, customers may need to make an advance payment to secure a sale or cover certain expenses incurred by the vendor, like materials or labor involved in providing a particular service.
Subscription models: Breaking up payments into monthly or annual subscription models can help make it easier and more manageable for customers to pay for services or products while ensuring that vendors get paid on time and reliably.
Short-term loans: These are loans of less than 12 months with repayment plans that include fees or interest. These loans may come from the vendor or through a lending institution or bank. Loans have become considerably more expensive over the past year, with the Federal Reserve hiking the rate 11 times since March 2022 to stem rising inflation.
Equity agreements: Equity agreements are arrangements between two parties where the seller provides goods or services in exchange for a certain amount of equity, usually represented through stocks or shares. This can make it easier for smaller businesses that don't have much cash flow to acquire goods while allowing the seller to benefit from the company's growth potential.
The Procurement Strategy Playbook for Modern Businesses
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Net terms as a service as an alternative to standard net terms
With the evolving credit landscape, 2023 has seen changing procurement trends, including how sellers and buyers approach purchasing and financing. Net terms as a service is an alternative to standard net terms that allows vendors to receive payment for their services through a third party without interest rates or fees. This agreement can benefit the vendor, as it provides a reliable source of income over an extended period. It also helps businesses with limited cash flow access the goods and services they need to help them grow.
How do net terms as a service work?
Vendors that leverage net terms as a service do so through a third-party procurement platform like Order.co. The platform acts as an intermediary between the vendor and the customer, processing orders and paying the vendor for the purchase. Order.co then provides uniform net terms on all purchases from the vendor to the buyer. Because the procurement platform provides this service, buyers can access extended net terms with flexible, universal credit checks and no fees, loss of equity, or interest payments.
What are the benefits of net terms as a service?
Net terms agreements with Order.co offer both buyers and sellers benefits that smooth out bumps in the buy-sell cycle without sacrificing cash flow or deal security. They make it easier for companies to get what they need while providing revenue stability to suppliers.
Here are some of the ways net terms as a service improve procurement:
Access to capital: Order.co offers buyers more alternatives to taking out a loan. Through Order.co Financial Offerings, organizations can access up to $500,000 in preferred credit to buy the necessary supplies and equipment without red tape or long settlement periods. This levels the playing field and speeds up the cash conversion process so businesses can become cash flow positive sooner.
Instant access to supplies: Using a procurement management system for net terms on supplies means buyers have access to the items they need without delays for repeated credit checks, individual vendor setup, or prolonged sourcing research. Buyers can use the vendors they already work with and access an extended marketplace of vendors when they don’t have an existing contact.
Stability in repayments: Universal net terms simplify the payment process for buyers, making accounts payable and cash planning more streamlined. It also means fewer variables to track between each vendor and less chance that payments will slip through the cracks. On the vendor side, payment upfront makes revenue planning straightforward and dependable.
Reasonable credit requirements: Small businesses and new business entities often experience limitations in their borrowing power due to traditional credit reporting and risk management. A preferred advance with flexible terms allows them to benefit from financing without worrying about compounding high rates- just one fee agreed to upfront.
Security for vendors: Extending net terms to a buyer is a trust exercise. The vendor must have reasonable assurance that the buyer will repay the debt on time. With net terms as a service, the vendor receives payment upfront. This makes working with buyers at every size and stage easier without adding risk.
Stronger relationships: Buyers and sellers agree that streamlined buying and upfront payment make vendor relationships better. Net terms as a service help both parties move away from transactional procurement to build more stability and collaboration in their businesses.
Get Order.co for better terms and more flexibility
Order.co offers many features that benefit both vendors and buyers. The platform makes it easy for known buyers to transact and gives vendors access to new clients looking for the best rates, service, and quality.
With access to net terms as a service, vendors are empowered to close deals with full confidence in repayment and easier cash flow planning. Partner with Order.co and offer your customers flexible payment options while ensuring zero risk to your business.
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