This guide will provide you with information on using new digital technologies to run your complete net terms management online, rather than the complicated and timely traditional method of paperwork and manual processes.
Net terms are payment terms that allow your company to collect money from customers after products are delivered, rather than requiring payment upfront. Also known as credit terms, net terms can range from a 30 (“net 30”), 60 (“net 60”), or a 90-day (“net 90”) payment cycle.
Learn more about net terms, the first day of the “net” period, and who should offer net terms.
Pros and cons of offering net terms
Companies offer net terms for many reasons. Net terms are often used as a sales tactic that can lead to larger sales orders, higher frequency in sales, and customer loyalty. Offering flexible payment terms can be especially helpful for smaller businesses run by first-time entrepreneurs, as they may require more time to market and sell new products before paying for the supplies.
However, net terms can also create cash flow problems for many businesses. Offering net terms without the proper due diligence such as checking the creditworthiness of customers increases the risk of bad debts and additional steps in managing late payments. To learn more, access our additional resources on:
- The advantages and disadvantages of offering net 30/60/90 terms
- The pros and cons of offering net terms financing (useful if you are unsure whether to start offering net terms)
Challenges of managing net terms manually (the traditional way)
1. Extra administrative work
Offering net terms adds workload to your processes and requires additional resources to your accounts receivable and credit management team. There is no standardized net terms process that can be applied to every single customer. All customers, accounts, and even transactions are individualized and treated differently. Your team must first act as B2B credit specialists that will need to analyze, collect data, and credit check each customer to determine their creditworthiness and make credit line decisions. They will need to call trade references. On top of that, your team may then need to act like a full AR team by managing and tracking the paperwork of the net terms agreed upon, send the correct invoices, follow up on invoices, send reminders, process payments, and reconcile full payments back to the accounting system. All these steps create extra work!
2. Scaling difficulty
Manually managing how you offer net terms is extremely difficult to scale. Lots of moving parts in the process can lead to increased complexity and it is not always economically feasible to keep adding new team members as the number of customer accounts grow.
3. Risk of human error
Even if you added more people on your team to manage your net terms program manually, this can still lead to a higher risk of errors in the process. Teams needs to analyze every customer and every sales order request, often subjectively, to decide the net terms credit line decision.
If you happen to offer an early payment discount option alongside your net terms, it gets even more complicated for your team to track, further increasing the risk of errors.
For example, 2/10 Net 30 (2% discount if they pay the full amount within 10 days), might be the agreement you have with one customer—but not another. What if your team makes a mistake in interpreting the invoice date?
Learn more about commonly used payment terms on invoices.
4. Difficulty in tracking the manual process
Offering net terms is not a one-time incident. This is a regular program that turns into a regular cycle with each new customer and transaction. This can understandably become difficult to track at the end of the month, if tracked manually.
Your team might manually track the payment history and net terms specificities of your customers in a spreadsheet.
However, this is extremely difficult to track and manage manually when you have more than hundreds of customers.
5. High risk of unpaid invoices and bad debts
Ultimately, net terms are a form of business credit. But the truth is: sometimes your customers will not pay at all. This can happen more frequently if there is no appropriate due diligence and creditworthiness check before offering net terms. Since the customers were not creditworthy to being with, of course this would result in higher risk of unpaid invoices and bad debt! A loss rate can negatively impact your cash flow and bottom line.
6. Increased costs related to collections and hiring debt collection agencies
When customers do not pay you by their stated due date, your team has a lot of work to do: creating notices, writing demand letters, hiring debt collection agencies, and ultimately, managing the legal route to deal with such circumstances. However, all these additional tasks come with additional costs which might not make sense, especially for small business owners.
7. Poor customer experience leads to slower sales and growth
When you handle your net terms program manually, there is a higher risk of errors, delays, miscommunication, and confusion for your customers.
Even though they want to pay you on time, your in-house team might struggle with wrong invoices, inaccurate net terms or discounting, and constant to-and-from communication. It’s a lot of work!
This leads to a slower sales cycle, which impacts your business growth. If your process is messy, confusing, and even continues for a long time, you even risk losing your customers.
Benefits of digitizing and offering net terms online
And that’s why many businesses, especially manufacturers, distributors, and suppliers - are looking for ways to automate and offer their net terms online, either through a net terms checkout button, or another solution. Here are just some of the benefits of digitizing your terms program.
1. Gain back time due to strategic re-allocation of resources
Manual processes eat up the time of your AR team as they are managing bookkeeping, endless paperwork, and menial tasks. But these tasks can be easily automated! By offering net terms online, you save a lot of time on manual and labor-heavy tasks and scale your business without investing in extra resources.
Some of these tasks that suddenly become easier include:
- Faster credit checks: Some online net terms solutions often do faster and more reliable credit checks than any manual process can. An online solution can also result in better credit terms that are offered to customers as their creditworthiness was checked by the experts, not your in-house team.
- Workflow optimization: Online solutions can take care of not just your invoice payment terms, but also your entire accounts receivable workflow. This includes invoice creation according to the right credit terms, automated follow-ups and reminders, automatic application of late fees, and keeping track of your AR aging so you can modify credit terms based on the payment history of customers to avoid bad debts.
- Save on labor costs: A complete net terms solution frees up a lot of time from your accounts receivable team. If you're a growing small business, you likely won’t even need to hire a full-time AR team if you have a dedicated outsourced solution to manage your AR, net terms, and credit.
2. Receive (optional) advance payments on invoices
One of the drawbacks of offering net terms to your customers is that it can create cash flow timing issues for your business.
However, if you choose to work with a complete end-to-end net terms solution, you may receive the option to get paid faster before the terms due date. For instance, Resolve is a solution where a business can receive up to a 90% advance payment on their Net 30 invoices within a day.
This can help you gain all the benefits of offering net terms — without compromising your cash flow and putting your bottom line at risk.
3. Minimize risk
A complete online net terms management solution like Resolve has a robust credit risk management system led by experts. This ensures that your business only offers net terms to customers who have a good credit history, thereby decreasing your risk of late or non-payment.
Moreover, a company like Resolve works on non-recourse financing. This means that they bear the risk of non-payment of the invoice. In these cases, you and your business is not responsible for covering any customer payment that is not received.
As you can see, outsourcing your net terms minimizes your risk and helps you operate and grow your business without worrying about lending credit and non-payment.
After all, you are not a bank and you should not act like one!
How to offer net terms online: choosing the right net terms solution partner
Before selecting an online net terms solution for your B2B business, it is essential to figure out your requirements. A tool with fancy bells and whistles might not be relevant to your business, depending on your goals:
Look for functionalities that will help you:
- Manage your net terms online in an automated manner
- Simplify the B2B payment process for your team as well as customers
- Streamline your entire accounts receivable workflow
Here are a few parameters to keep in mind when you choose a digital net terms solution partner:
B2B business processes already have an inherent complexity due to the high volume and frequency of transactions, and all the different stakeholders involved.
Therefore, any net terms solution you decide to use must be simple for your team to use, as well as your customers.
This means simplified navigation, intuitive and uncluttered user interfaces, and very easy-to-understand functionality to get the job done.
2. Credit risk expertise
A net terms solutions provider must act as your "credit team on tap". They must be able to reliably conduct thorough credit checks on interested customers to assess their creditworthiness and make smart decisions on your behalf.
Always find out how they do credit checks. Ask and assess if they use reliable methods to determine credit limits and net terms for each customer.
The right type of credit risk analysis should involve close scrutiny of the financial health of the customer, looking at their credit scores, and previous payment histories, and a calculated and data-driven way to assess risk level.
3. Better experience for your customers
B2B payments are tricky and most customers look for a hassle-free way to deal with them.
Your online net terms solution should make it a breeze for your customers to manage their credit terms, as well as conduct any transactions with your company. A positive customer experience is critical to set you apart from your competitors.
Here are a few guiding points to determine if your net terms management provider can offer a great customer experience:
- A complicated process to get approval for net terms can frustrate your customers.
- How long does it take your net terms partner to determine creditworthiness?
- Do your customers need to apply for credit terms on every single transaction?
- How much time does it take your net terms solution approve your customer for credit after they apply for net terms?
Answers to the above questions will help you assess if that solution provider is capable to offer net payment terms in a seamless way.
Your customers will likely prefer to deal with your business directly instead of a third-party provider. Sometimes working with a third-party can also give a negative impression, especially when it comes to offering credit and collecting payments.
Assess if your net terms solution provides a white-label experience and gives a branded solution including the use of your logo.
Automation can elevate the entire customer experience of dealing with your business.Look for options that offer pre-approved discounts on early payments and automatic extension of credit lines based on payment history and aging.
This will also free up the time of your in-house accounts receivable team and help them focus on more valuble parts of your business.
4. Payment versatility and flexibility
Customers prefer multiple payment options such as credit card, debit card, ACH, and wire transfers —with reasonable transaction rates. That's why it is essential that your payment partner supports all popular electronic payment methods.
Additionally, your customers must be able to pay online with one-click or experience seamless checkout options. Look for reviews about the ease and functionality of the payment portal for customers.
5. Accounts receivable collections
The best net terms solution provider will completely streamline your accounts receivable process. Net terms always creates a more challenging AR process as somebody needs to make sure payments are collected and reconciled. In fact, collections may be the most time-consuming process for your team.
While choosing your online net terms management solution, ask the following questions:
- Can this solution send automated reminders to my customers for payments?
- What is their collection process like? I need to trust them with my customers.
- Do they follow up aggressively or send friendly reminders which I can trust?
Managing receivable collections is a delicate responsibility and you must ensure that the provider follows an efficient process. This is important to build and maintain healthy customer relationships.
Learn more about accounts receivables automation best practices.
6. Financial velocity through embedded credit
Your business needs cash to operate and carry out day-to-day functionalities. But, when you offer a line of credit, you sacrifice your cash flow in exchange for boosting sales.
One way to solve this is by getting advanced payment on invoices. A good net terms solutions provider like Resolve can offer up to 90% advance payment within a day on a Net 30 invoice while charging minimal transaction fees. Remember, this is unlike invoice factoring where the risk of non-payment is on you and where the transaction fee is quite high.
If this is a feature you’d like, assess if the net terms solution you are looking at can offer advance payment on invoices while managing AR collections from your customers.
This kind of embedded credit can solve your cash flow issues and help your business gain enough working capital to achieve financial velocity for faster growth.
Your net terms solutions must seamlessly integrate with your existing tech stack. Without this integration, the whole process could become more time-consuming and lead to more chaos than clarity.
The existing tech stack includes your accounting ERP, CRM, ecommerce platform, payment gateways, and other applications.
Most importantly, check whether the net terms provider can reconcile transactions between your accounting ERP and bank account statement. This is important for audits as well as to fulfill end-to-end reconciliations for each payment cycle.
8. Solution support
Before finalizing a net terms management solution, always make sure you check out the reviews on their customer support services - because you’ll most likely be using it one day!
You can use third-party sites like Capterra, TrustPilot, and G2 Crowd to go through different solutions and their user reviews.
Choose a product that can meet your specific business requirements and is credible among the users.
Last but not the least, do your due diligence on pricing and transaction fees when selecting an online net terms management partner. Watch out for any hidden transaction fees, upper limits, or any extra charges for any special circumstances.
Businesses using net terms ecommerce solutions
There are a growing number of B2B companies across different industries that are successfully offering net terms online solutions. Here are just a few examples.
1. Archipelago Lighting
The lighting manufacturing experts in LED lighting, Archipelago automated their net terms and decreased their turnaround time of net terms processing from 10 business days to just 24 hours. They are also able to offer 20X higher credit lines to their customers by eliminating the human subjectivity to make trade credit decisions.
2. Elston Materials
Elston Materials, a Chicago-based supplier of concrete and masonry products, struggled with long paying cycles in the slow-moving concrete industry. By using Resolve, they were able to solve their cash flow and working capital issues and negotiate better pricing with their suppliers and vendors. In this way, they successfully increased margins by 5%, from 25% to 30%.
GoMaterials is a B2B marketplace for landscaping materials. When they expanded into the US, they used quick and unobtrusive credit checks by Resolve to offer net terms to their customers that increased trust and helped them get new business faster. Beyond net terms, they were able to outsource credit and risk management in a new market while streamlining their entire payment and invoice processing workflow with Resolve.
4. DocShop Pro
DocShop Pro was able to become a true online B2B marketplace for medical supplies by integrating Resolve with their ecommerce platform, Magento. By using the embedded marketplace payment solution by Resolve, they offer a seamless checkout experience while offering immediate net terms enrollment to new customers.
5. Tern Bicycles
Tern Bicycles was looking for a net terms partner who can offer exceptional customer support and service while providing financing to their dealers. Since implementing Resolve, the company saw an increase of 30-40% in purchases from many of its dealers. By using Resolve, their dealers became more confident in placing larger orders by having real-time visibility of their accounts.
The bottom line: how B2B businesses offer net terms online
The key to offering net terms online is to choose a digital solution that can seamlessly integrate with your goals, existing process, and technical infrastructure, while alleviating the most pain for you. For instance, if approving the credit terms or your payment process is too complex, you will lose customers to competition easily.
B2B transactions and processes are more complex than their consumer counterpart. However, people have grown to expect a smooth online shopping experience, even if it is for business purposes. This is why B2B businesses need to take ecommerce seriously. B2B ecommerce connects wholesalers, retailers, third-party sellers, and consumers through one portal and enables them to carry out business transactions online.
Finding the right net terms management partner will take your net terms, credit management, and accounts receivable workflow to the next level. Overall, it will also help you offer a better B2B customer experience just like shopping on Amazon!