If you're engaged in B2B sales, you understand that offering payment terms is often non-negotiable for many business customers. It's a critical way to assist them in managing their cash flow.
But how can you provide net terms in the most effective way, ensuring an excellent customer experience, leveraging it as a competitive advantage, all while maintaining operational agility?
We cover it all in our latest guide, which you can download below:
Let's begin with some fundamental definitions:
Trade credit involves an arrangement between business parties that permits the exchange of goods and services without immediate monetary transactions.
Source: Corporate Finance Institute
Net terms, payment terms, and invoice payment terms all refer to the duration within which a customer must settle payment after receiving an invoice. Unlike credit cards that defer payment until the end of the month, net terms offer extended time to make the full payment.
The specific number of days for payment varies; common payment terms range from net 15, 30, 60, to 90 business days. This effectively extends the payment period for buyers, with the invoice date set to the purchase date plus the additional time.
Source: US Chamber of Commerce
To delve into the standard process of net terms for B2B suppliers, we've scrutinized over 100 trade credit applications. This analysis provides insight into the current industry landscape and suggests potential improvements for both potential buyers and organizations offering terms.
Based on these findings, we've developed a crucial net terms checklist encompassing the key components of a comprehensive trade credit application.
It's worth noting that the trade credit process can be segmented into three stages: approval and capital, point of purchase, and collections. In this guide, we'll primarily focus on the approval process.
Before diving into the application process, let's cover some basics:
How do businesses provide trade credit?
Currently, businesses have several methods to extend trade credit to buyers. The approach varies based on whether the solution encompasses the entire trade credit process or specific elements. Businesses may evaluate creditworthiness internally while using a business loan to extend the actual credit line. To assess risk, credit or finance teams might scrutinize buyer payment history and credit bureau data.
However, this becomes more challenging for new customers, as assessing risk at scale for unfamiliar business customers is complex. Risk management may involve late fees, upfront payments, or shorter payment terms like net 15 instead of net 45 or 60.
Alternatively, businesses seeking to offload non-payment risk might turn to invoice factoring. This involves "selling" some or all outstanding invoices to a third party to alleviate cash flow problems. However, high fees may apply — after all factoring companies won’t take over bad debt for nothing.
It's important to recognize that businesses still bear the responsibility of reconciling payments through accounts receivable.
Although many businesses currently opt to provide terms in-house, using their capital or bank loans, several challenges remain unresolved:
What are the primary challenges of in-house business credit provision?
Poor data visibility: In-house net payment term applications often necessitate manual entry into management systems, leading to errors, data silos, and a cumbersome process.
Slow onboarding process: Whether using PDFs or online forms, waiting for finance teams to manually approve each buyer results in a lengthy process.
Inability to approve small businesses or small business owners(SMBs): Limited data resources hinder thorough vetting or approval of smaller buyers with minimal publicly available data. This exacerbates the challenging credit environment for SMBs, as 80% lack access to affordable formal credit.
Limited credit lines: Businesses struggle to extend higher credit lines to buyers, facing difficulties in offering revolving credit or real-time credit increases. They might also be restricted from offering longer payment terms due to risk concerns.
Rising buyer expectations: Buyers now expect the same level of convenience and usability in business processes as they experience in the consumer world. This parallels the expectation for credit terms to mirror the convenience of credit card payments, a trend familiar to consumer-focused retailers.
The crucial net terms checklist
At Balance, we've assessed thousands of B2B buyers, from SMBs to large enterprises. We've designed a credit application flow that aligns with these organizations' actual requirements.
We provide upfront payment to merchants for the full amount of the invoice, alleviating cash flow concerns, while also instantly underwriting new and existing clients. Our platform addresses significant gaps in ease-of-use, convenience, and experience for both buyers and merchants in the terms approval process.
The following features are pivotal for an optimal net terms experience:
✓ Revolving credit:
While short-term payment terms are valuable, it's equally important to provide a range of payment options. Offering a minimum of net 30 to customers is a great start. But buyers deserve improved financing choices and rewards for prompt payments. With revolving credit, buyers can access larger credit lines and extended terms by consistently paying invoices on time.
✓ Credit control center:
Offering net terms shouldn't detract from your core operations. A dashboard provides complete visibility into approved clients, and adjusting terms and credit lines is effortless with a simple click.
✓ Dynamic digital experience:
Replace lengthy forms and PDFs with a dynamic back-end system that assesses buyer data in real-time, prompting additional queries only as necessary.
✓ Digital underwriting process:
Manual underwriting is time-consuming and prone to errors. A digital underwriting process utilizing diverse data sources qualifies more buyers swiftly, ensuring thorough vetting.
✓ Streamlined onboarding:
Complex requirements like annual fees and personal liability deter new buyers. A comprehensive underwriting process eliminates these barriers, welcoming new revenue opportunities even from first-time customers.
✓ Automated collections:
Automate dunning through strategic payment reminders and notifications to reduce collection effort and late payments.
✓ Instant qualification:
Leveraging digital underwriting, vetting buyers takes minutes, enabling immediate purchasing. Instant qualification frees finance teams for other essential tasks.
✓ Invoicing portal:
A centralized invoicing portal offers buyers a holistic view of paid and due invoices, simplifying payments.
✓ Scalable offering:
A digital application ensures scalable credit provision, enabling business growth without continually expanding credit and collections teams.
Current industry landscape
As great as these features are, they're not yet industry standards. We've examined over 100 net terms applications across industries to understand prevalent practices.
- Business types span physical goods wholesale, including automobile parts, electrical equipment, and industrial supplies.
- 98 out of 101 applications were from US-based companies, with the remaining three from the UK and Australia.
- Company revenue varied, encompassing small businesses, medium-sized enterprises, and large corporations.
- Most businesses fell within the $10M-$100M yearly revenue range.
Based on our research and analysis, below are some of the insights we found:
To get access to the full data, download the full guide here.
This data sample made one thing resoundingly clear: current industry practices are restrictive, static, and outdated. But the opportunity to differentiate by offering a digital net trade credit solution has never been greater.
Why B2B merchants use net terms with Balance
How can you empower your finance team and buyers with a digital trade credit solution? With Balance, there's no paperwork, printers, or friction involved. Buyers receive a qualification link for a quick submission, eliminating the need for PDFs or representative interaction. Plus, we offer a range of other features and benefits:
Balance's robust digital application guides buyers through various steps in real-time, tailored to their business size and provided information. Each new applying business experiences a unique application interface.
Advanced Underwriting Capabilities
Benefit from our sophisticated data sources and risk models, eliminating the need for strict eligibility criteria. Even smaller businesses can access favorable terms.
Instant Credit Approvals for Buyers
Balance provides instant access to credit lines of up to $50,000 for eligible buyers. Once approved, buyers can immediately make purchases using their credit. Higher credit lines are accessible after a brief verification process.
Simplified Revolving Credit
With Balance's dashboard, merchants gain complete visibility into the status of each term application. Real-time adjustments to term limits and credit lines enable effortless implementation of a revolving credit program for buyers.
Balance's user-friendly buyer portal consolidates all of your customer's outstanding payments in one accessible location. This centralized platform enhances communication and provides enhanced visibility to your teams regarding invoice payments, while also making accounts payable simpler for your customers.
Balance automates timely payment reminders through email, ensuring swift collections and minimizing manual follow-ups. Tailor the frequency of reminders to meet your specific needs, providing a personalized touch.
Balance integrates seamlessly with the world's most popular B2B ecommerce platforms, allowing merchants to embed financing directly into their storefronts.
A Scalable Solution
By replacing manual approval and collections processes with Balance, even previously denied customers gain access to credit. Merchants can expand and scale globally without the need to reconstruct a new trade credit process for each market.
Furthermore, you can foster customer loyalty and onboard new business and new clients—ultimately leading to revenue growth.
The best part? You can begin leveraging Balance today as a payment option without disrupting your operations.
If you're ready to start, reach out to one of our experts.
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