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calendar    Apr 04, 2025

When Should a Business Offer Net Terms Financing

Cash flow is a crucial factor when deciding whether to offer net terms, but it’s not the only consideration. A business with inconsistent cash flow and difficulty maintaining a healthy bank balance should hesitate before extending credit. Offering net terms means delaying incoming payments, which can put additional strain on the company's financial stability. Without a solid cash reserve, a business simply doesn’t have the luxury of offering credit without risking its own liquidity.

On the other hand, a business with steady cash flow that can comfortably cover operating costs while maintaining a buffer is in a better position to offer net terms. Extending credit to customers can open up more sales opportunities, but it also requires careful management to ensure it doesn't lead to future liquidity problems. Continuously monitoring cash flow and ensuring that payment delays won’t disrupt operations are essential when deciding to offer credit terms.

If your business is in a strong financial position, offering net terms can be a smart move. Many customers prefer paying on credit, which could help you attract more business and foster long-term customer loyalty. However, it’s essential to weigh the risks—especially in uncertain economic times. Regularly assessing the potential impact on cash flow and using credit terms strategically rather than as a blanket policy can help you balance customer demands with your company’s financial health. By making well-informed decisions, businesses can leverage net terms to drive growth without jeopardizing their stability.

Cash flow - the determining factor

Cash flow is certainly a determining factor in offering net terms. It isn’t the only factor, but it is one of the most important. A business that has sporadic cash flow and a difficult time keeping money in the bank is not a candidate for extending credit to customers. Extending credit means delaying payment. In other words, it means delaying additional cash flowing into the company. A business with no money in the bank doesn’t have the luxury of offering credit.

A business that does have steady cash flow and is able to pay its suppliers and employees may be able to extend credit. If there is enough cash left over after paying expenses, the company can finance its customers through net terms.

Cash flow that is just able to meet employee and supplier expenses doesn’t allow enough margin for extending credit. If the company is basically out of money once suppliers and employees are paid, it is dependent on an immediate injection of cash. That cash flow can’t be diverted to customer financing.

From the above, we can see that a company must be able to pay all of its immediate expenses and have enough cash left over to finance customers. The amount of cash left over will determine the net terms that the company is able to offer.

Implementing net terms financing

Once a company begins extending credit, its accounts receivable will become more complex. There is far more to track:

  • Issuing invoices
  • Collecting payment
  • Sending reminders
  • Sending overdue notices
  • Writing off bad debts

Employees who are knowledgeable about A/R will be needed to ensure A/R is able to function, even when one of its employees calls in sick or quits. Software like Resolve's Net Terms product can greatly reduce the burden of accounts receivable management. Eventually, the company can automate most of its accounts receivable management. An advantage of using more sophisticated A/R software packages is that they allow you to perform analysis and constantly improve your A/R.

In addition to changes in A/R, the company will need to manage its cash flow so it doesn’t run out of cash and is able to continue paying its bills. Projections will have to take net terms into account as incoming money will be delayed. Projects will be affected as well; some may be delayed or scaled back. Most companies run on accrual accounting. If the business was one of those rare pure-cash accounting unicorns, it would need to migrate over to accrual accounting.

While the above may sound negative, there are plenty of advantages to offering net terms. The main advantage will be an increase in customers. It can also mean more stable customers because larger customers mostly work on net terms.

How to decide which net terms to offer?

There are many ways to offer net terms financing: 30 days, 60 days, 90 days, and even something in between are all viable. How do you know which to use? It will largely depend on your industry, which requires some researching. If the industry average is 60 days, starting there isn’t a bad idea. You’ll also need to determine how much your bank account can handle.

For customers who always pay on time, you may consider increasing their terms from 60 to 75 days. This will set you apart from the competition. After all, if a company can delay payment by an extra 15 days, it may choose a vendor that offers those terms over one that doesn’t. Discounts are another good idea and can speed up payments. For example, a 2% discount can be offered for customers who pay at 30 days and a 1% discount for those who pay at 45 days. You’ll increase cash flow by offering these discounts.

The flipside of discounts is that they compress margins. Rather than receiving 100% of an invoice’s value after 60 days, you instead receive 98% after 30 days. Small increases in product prices can cover this difference, assuming your pricing remains competitive. For a business that is moving to offer net terms financing, the changes required can be big. Payments no longer come in immediately and are instead delayed by weeks or even months. Accounts receivable becomes more complex and costly.

Despite the additional labor and cost, net terms financing opens the door to potentially far more customers. You’ll also attract larger customers, who bring with them stability. Overall, net terms financing is a positive for companies that are looking to grow.

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