Everything you need to know about net terms for your business In an ideal world, businesses would always have the cash on hand they needed to buy raw materials, inventory, and supplies from vendors and settle their accounts immediately. Unfortunately, cash is a luxury for many small businesses.
In fact, 40% of small businesses admit they’ve experienced cash shortages within the previous 12 months. In large part, this is due to the fact that 64% of small businesses are waiting onlate payments, according to our analysis of over 20 million invoices.
Instead of denying cash-strapped buyers their orders—and sacrificing the accompanying revenue—some suppliers use a business financing option called trade credit to front inventory to small businesses, giving them some predetermined period of time to pay for the goods. Trade credit is also known as vendor credit, or “net terms.” This practice is very commonamong businesses that serve other businesses (B2Bs). Trade credit enables a small business to gain additional revenue from cash-starved businesses that cannot pay immediately.
Under these agreements, buyers get the inventory and supplies they need right away without having to pay until an agreed-upon future date.
Trade credit is a financing option that enables businesses to buy products and supplies from other companies that they don’t have to pay for right away. Sellers that grant their customers trade credit generally give them anywhere between 30 and 120 days to settle their accounts. The range, however, can be higher or lower depending on the industry and individual seller. Most sellers that use trade credit offer discounts to customers that pay their full balance before it’s due (more on that later).Be warned: If you use trade credit and you’re unable to pay your balance in full by the time it’s due, you may incur late payment penalties, depending on the terms of your agreement.
When you finish dinner at a restaurant, the bill comes. You’re expected to pay it before you leave. You can either pay with cash, or you can do what almost everyone does, and put down your credit card.
Most consumers are so used to using credit cards that they hardly ever think about the fact that credit cards are actually a financing tool. When you charge dinner on your card, the restaurant gets paid right away, but you, the buyer, get to defer the payment. The charge goes on your monthly statement, and you have 30 days to pay. If you want, you can carry a statement balance, and pay it off over months or even year.
Net terms, just like consumer credit cards, give business buyers a cushion of extra time to pay their invoices.
Sellers and vendors that offer net terms provide the product or service right away but don’t expect buyers to pay until the agreed-upon time.