Which Invoice Deadline Should One Choose? An Overview of Different Customer Payment Terms
Interstate Capital discusses the most common customer payment terms and the impact they have on a business.
SANTA TERESA, N.M., May 18, 2018 (Newswire.com) - There are many different payment terms that can be extended to customers, such as net 30, net 60 or net 90. But what exactly do each of them mean? And do these payment terms benefit or restrict a business? Interstate Capital discusses the most common customer payment terms and the impact they have on a business.
Although establishing and enforcing payment deadlines is critical to healthy cash flow management, most business owners would say they have no idea of the hidden traps of customer payment terms. So, here is a quick breakdown of the three most common types of invoice deadlines:
Option One: Net 30 Terms
With net 30 terms, the customer has 30 days to pay the net amount (total minus any discounts), before a company may start adding finance charges or late fees to the invoice amount.
Option Two: Net 60 Terms
With net 60 payment terms, the customer has 60 days to pay the net 60 amount (total minus any discounts), before accruing a finance charge.
Option Three: Net 90 Terms
With extended, net 90-day payment terms, the customer has 90 days to pay the net 90 amount (total minus any discounts), before accruing a finance charge.
Now that the most common terms of payment have been explored, here is a list of the obstacles that different customer payment terms can present for small businesses.
When extended payment terms are offered, a product is basically been given on loan to a customer until the customer can pay for the product, while a company’s operating costs continue to grow and working capital decreases. If the business decides they can realistically carry account receivables of $30,000, then it is going to need a game plan for replacing that $30,000 in its cash flow. There is also the additional expense of credit checking, credit-bureau memberships and the cost of collection agencies.
But, for many businesses, invoice payment terms are not the problem.
The real problem is when the invoice will actually get paid.
The lapse between the time a business has to pay its own bills and the time they collect from their customers can create a financial strain for their business.
Inconsistent cash flow, as a result of late customer payments, is a frustrating experience for any business owner. The consequences to a business can be damaging and widespread, encompassing everything from an inability to pay their employees and suppliers to stifled business growth due to an inability to take on new projects.
The solution comes down to cash flow management. At its core, cash flow management means encouraging customers who owe a business money to pay it as quickly as possible, while delaying expenses as long as possible.
So, how can business owners avoid putting themselves at the mercy of delayed accounts receivables?
Solutions to Speed Up Cash Flow
In a perfect world, a company’s customers would pay invoices immediately. Unfortunately, that doesn't always happen.
The key is to improve the speed with which a business turns its account receivables into cash. Here are some specific techniques for doing this:
● Ask customers to make a deposit at the time orders are taken.
● Offer discounts to customers who pay their invoices on time.
● Require credit checks on all new customers or those with extended payment terms.
● Issue invoices promptly and follow up immediately if on-time payment isn’t received.
● Track accounts receivable to identify and avoid customers who don’t comply with the payment terms of the business.
If a business owner is looking for a solution that gives them more cash flow flexibility, and includes other benefits like collections and credit checks, they may want to consider invoice factoring.
If a company regularly generates commercial invoices, it may be a candidate for invoice factoring, which will provide the cash that is needed to fund growth, take advantage of early-payment discounts suppliers offer and reduce the payment time of account receivables.
Invoice factoring is a financing method in which a business owner sells his/her invoices to a factoring company. This is a financial business that can pay a business almost immediately for receivables they may not otherwise be able to collect on for weeks or months. The business will eliminate the hassle of collecting on customer accounts and be able to fund current operations without borrowing.
In a typical invoice factoring arrangement, the client makes a sale, delivers the product or service and generates an invoice. The factoring company (the funding source) buys the right to collect on that invoice by agreeing to pay the client the face value of the invoice less a small percentage discount.
With all of the cash flow-disrupting risks associated with extended credit terms, it may be wise to choose a simple solution like invoice factoring.
A Final Word on Extended Payment Terms
Extended payment terms can be an asset to a business, helping to attract new customers and retain current ones. But extended credit can also set a business up for collection and cash flow problems later. By being proactive about securing working capital ahead of the company’s need, the business owner can grow their business while avoiding the crippling cash-flow crunch that many business owners struggle with.
Regardless of a company’s industry or financial situation, invoice factoring represents a reliable debt-free financing solution. The factoring specialists at Interstate Capital, one of North America’s leading factoring firms, can help business owners decide if factoring is the right cash flow solution for their business. Since 1993, more than 10,000 companies have chosen Interstate Capital as their factoring partner for financial peace of mind and growth.
Source: Interstate Capital