It’s a tough reality for companies in the B2B sector that cash rarely exchanges hands at the point of sale. Today, 60 percent of small businesses extend net terms, whether it’s 30, 60, or 90-days.
But with bills to pay and inventory and supplies to be purchased, net terms, also known as trade credit, can be problematic.
Nearly half of all small businesses report experiencing cash shortages. Much of this has to do with the fact that 64 percent of these businesses wait on late payments, with professional services firms like accountants, web designers, construction trades, and cleaning services being most impacted. It’s not uncommon for 48 percent of net 30 invoices, 45 percent of net 60, and 35 percent of net 90 invoices to be paid late.
Still, despite the impact on cash flow, extending generous net terms as trade credit has become a vital selling point and differentiator for B2B businesses.
The Advantages of Trade Credit
Here are some of the main benefits of using trade credit
- It helps build stronger relationships
Your customers will always appreciate some extra time to pay. Offering flexible terms is an important way to build trust and better customer relationships. Even if your customers owe you money for longer than you like (or can afford), trade credit can sometimes pay for itself because it gives your buyers wiggle room to put their cash to work in other areas of their business. This flexibility can drive customer loyalty, higher sales volume, and repeat purchases.
2. It could increase your sales volumes
B2B companies that offer trade credit can typically count on more sales than if they offered only immediate payment terms. With zero interest and extended terms, your customers now have increased purchasing power and may be more likely to commit to a larger scope of work or bigger orders since they have longer to pay. Not only can you sell more, but by offering generous net terms you can also expand your business footprint into more markets or locations than if you insisted on upfront payments.
3. It can give you a competitive advantage
When you’re competing for contracts and deals against similar companies, flexible net terms make a big difference to potential clients who can delay payments until they’re paid by their own end customers.
- It positions you as financially secure
B2B transactions are rarely one-off and clients are keen to work with businesses who are fiscally responsible and secure. Extending trade credit indicates to your customers that you are financially stable and a reliable long-term business partner.
But Small Businesses Can’t Afford to Act Like a Bank
Despite the benefits, extending trade credit is a risk for small businesses, especially given the propensity for clients to pay late anyway.
Even if you extend trade credit to net 30-days, it’s likely that many of those payments won’t get paid on time anyway. Consequently, your cash flow would take a hit due to late payments and delayed sales revenues.
At the end of the day, when you offer credit to your customers, you’re acting like a bank, extending loans at your own expense.
Making Trade Credit Work for Your Business
With trade credit so critical to building your business, what are your options?
You could offer a discount to prompt early payment or accept online payments to speed transactions. Another option is to remove the burden of acting like a bank by taking advantage of trade credit financing solutions like Fundbox Pay. Using Fundbox Pay, you get paid right away and your approved customers get convenient net terms to pay their invoices, interest-free, with the option of extended terms for customers who qualify.
With so many professional services businesses experiencing late payments anyway, extending trade credit has become a mainstay of doing business—whether you intended it to or not. But solutions like Fundbox Pay, take the risk out of offering net terms and help you reap the benefits so that you can grow your business without floating your customers. Meanwhile, your buyers get what they want, right away.
The SmallBizRising Blog is designed to be an educational content hub pulling information, best practices and practical advice for the small business owner and features topics including accounting, marketing, technology and more. Be sure to subscribe to stay up to date with new content as it is posted. The blog was created by The Neat Company and receives contributed content from a group of contributing companies that provide technology, services and solutions to small businesses.