payment terms

An Overview of Different Customer Payment Terms

There are many different payment terms you can extend to customers, such as net 30, net 60 or net 90. But what exactly do each of them mean to your business? And do these payment terms benefit or restrict your business?

Although establishing and enforcing payment deadlines is critical to healthy cash flow management, most business owners would say they have no idea of the hidden traps of customer payment terms. So, here is a quick breakdown of the three most common types of invoice deadlines:

Option One: Net 30 Terms

With net 30 terms, the customer has 30 days to pay the net amount (total minus any discounts), before a company may start adding finance charges or late fees to the invoice amount.

Option Two: Net 60 Terms

With net 60 payment terms, the customer has 60 days to pay the net 60 amount (total minus any discounts), before accruing a finance charge.

Option Three: Net 90 Terms

With extended, net 90-day payment terms, the customer has 90 days to pay the net 90 amount (total minus any discounts), before accruing a finance charge.

Now that you understand common terms of payment, let’s explore the obstacles that different customer payment terms can present for small businesses.

The Risks

When you offer extended payment terms, you are basically giving your product on loan to the customer until they pay you, while your operating costs continue to grow and working capital decreases. If you decide you can realistically carry account receivables of $30,000, then you are going to need a game plan for replacing that $30,000 in your cash flow. There is also the additional expense of credit checking, credit-bureau memberships and the cost of collection agencies.

But, for many businesses, invoice payment terms are not the problem.

The real problem is when the invoice will actually get paid.

The lapse between the time you have to pay your own bills and the time you collect from your customers can create a financial strain for your business.

Inconsistent cash flow, as a result of late customer payments, is a frustrating experience for any business owner. The consequences to a business can be damaging and widespread, encompassing everything from an inability to pay your employees and suppliers to stifled business growth due to an inability to take on new projects.

The solution comes down to cash flow management. At its core, cash flow management means encouraging customers who owe you money to pay it as quickly as possible, while delaying expenses as long as possible.

So, how can business owners avoid putting themselves at the mercy of delayed accounts receivables?

Solutions to Speed Up Cash Flow

In a perfect world, your customers would pay your invoices immediately. Unfortunately, that doesn’t always happen.

The key is to improve the speed with which you turn your account receivables into cash. Here are some specific techniques for doing this:

  • Ask customers to make a deposit at the time orders are taken.
  • Offer discounts to customers who pay their invoices on time.
  • Require credit checks on all new customers or those with extended payment terms.
  • Issue invoices promptly and follow up immediately if you don’t receive on-time payment.
  • Track accounts receivable to identify and avoid customers who don’t comply with your business’ payment terms.

If you’re looking for a solution that gives you more cash flow flexibility and includes other benefits like collections and credit checks, you may want to consider invoice factoring.

Invoice Factoring

If your company regularly generates commercial invoices, you may be a candidate for invoice factoring, which will provide the cash you need to fund growth, take advantage of early-payment discounts suppliers offer and reduce the payment time of account receivables.

Invoice factoring is a financing method in which a business owner sells his/her invoices to a factoring company. This is a financial business that can pay you almost immediately for receivables you may not otherwise be able to collect on for weeks or months. You’ll eliminate the hassle of collecting on customer accounts and you’ll be able to fund current operations without borrowing.

In a typical invoice factoring arrangement, the client (you) makes a sale, delivers the product or service and generates an invoice. The factoring company (the funding source) buys the right to collect on that invoice by agreeing to pay you the face value of the invoice less a small percentage discount.

With all of the cash flow-disrupting risks associated with extended credit terms, it may be wise to choose a simple solution like invoice factoring.

A Final Word on Extended Payment Terms

Extended payment terms can be an asset to your business, helping to attract new customers and retain current ones. But extended credit can also set you up for collection and cash flow problems later. By being proactive about securing working capital ahead of your need, you can grow your business while avoiding the crippling cash-flow crunch that many business owners struggle with.

Want to avoid the negative impact of delayed customer payments on your cash flow? To help grow your business and eliminate the stress of slow-paying customers, you can rely on Interstate Capital. Get a free consultation today