How to Offer Net-30 Terms When You Can’t Afford To

Many small business owners cringe when they make a big sale to a customer asking for payment terms – the option to pay an invoice in 30, 60, or even 80 days. Waiting that long for payment can have negative financial consequences for a business without the resources to wait.

For example, if you sell products, you have to pay suppliers and employees to deliver the order. And then you need to run your business for up to two months before getting paid. The situation is similar if you provide services, but instead of paying suppliers, your big expense is staff payroll.

Unless you have significant capital reserves, you will have a problem. You have two options. You can either ask clients to pay quickly, or you can seek external working capital to cover business expenses.

Why do large companies pay slowly?

Large companies tend to pay slowly and ask for terms for two reasons. The first reason is mostly bureaucratic. In large companies, invoices often need to go through various layers of internal approvals. The second reason is that it’s good for their cash flow. By paying slowly, the company gets to use your products/services free of charge for a while. For your client, it’s like getting an interest-free loan. For you, however, this comes as an expense.

Ask clients to pay quickly and offer a discount

One strategy to solve this issue is to ask clients to pay quickly. Obviously, they won’t pay sooner for free, but they may be tempted if you offer a prompt payment discount (around 2%). This approach can improve their profitability and your cash flow at the same time, so it’s obviously a win for both parties.

However, clients pay sooner only if they have money just sitting in the bank. And remember that clients could resume their old payment habits if cash becomes tight, so this strategy is not always reliable.

A smart way of offering net-30 terms

If you can’t afford to offer payment terms but have clients who give you no other choice, consider factoring your invoices. Invoice factoring is a financial tool designed specifically to help companies that must offer terms, but can’t afford to. Factoring uses a financial intermediary, a factoring company, to buy your invoices and advance you money against them. A transaction looks like this:

  1. You deliver your product or service
  2. You invoice your client
  3. The factor pays you, using the invoice as collateral
  4. Your customer pays, which closes the transaction

The factoring company uses your invoices as the main collateral for the transaction. So it’s critical that your company has good invoicing practices and that the credit quality of your clients is good. You can find more details on this solution here.

A tool for growth

The main benefit that your company gets from financing invoices is the ability to offer payment terms to clients. Once your services are completed, you can invoice for them and fund the invoice through the finance company.

This strategy shortens your working capital cycle dramatically and allows you to grow your company. When used correctly, it provides many of the benefits that you would get if your clients paid for your services on delivery (or shortly thereafter).

Improve your client portfolio

The factoring company can also help evaluate the creditworthiness of clients. Evaluating creditworthiness is as much a science as it is an art, and many small businesses get this wrong and run into problems. Most factoring companies are adept at examining creditworthiness and will gladly help you evaluate clients.

This assistance helps ensure that you provide term credit to only those clients with a good track record of payment who are unlikely to become write-offs.  Obviously, you should offer terms only to clients that have good credit, since the only thing worse than a slow payment is no payment at all.

Can we help you?

We are a leading factoring company and can offer competitive financing packages. For a quote, please fill out this form or call (877) 300 3258.