Sadie Keljikian, Top Billion Finance
When it comes to trade, wholesalers often have a considerable number of potential issues to confront. They need to account for manufacturing and shipping costs, logistical concerns, control the quality of their products, maintain good relationships with their customers, and ensure that they receive payment for every invoice. When selling goods to retailers, one of the more complex negotiations surrounds how and when the customer will pay, or the agreed payment terms.
Depending on the vendor and the customer, they will come to one of a variety of agreements. Generally, when the customer has reasonably good credit and/or a solid relationship with the vendor, they will prefer to use open terms. Open terms on an invoice mean that the customer has a particular time frame in which to pay, beginning on the invoice date. Some common terms are Net 7 (meaning payment is due 7 days from the invoice date), Net 10, Net 30 and so on up to Net 90.
An account with open payment terms is ideal for the customer, since they don’t have to pay until after they receive the order. This means that they can place large inventory orders regardless of cash flow and pay when they receive the order as expected. For vendors, however, selling on open terms can be a double-edged sword.
On the favorable side, selling on open terms can offer a competitive edge to vendors who find themselves struggling to gain new business, since most customers prefer to have an open account with their vendors. In addition, when customers buy on open terms, they tend to place larger orders than they would under COD (cash on delivery) or similar terms. If customers don’t pay on time, they will accrue interest and/or late fees on the past-due invoices, which means more revenue for the vendor when they eventually receive payment.
Less favorably, sales on open terms can be risky when made to customers who aren’t as trustworthy. There is no guarantee that the vendor receive payment on time or even reasonably close to the due date. If too many customers are delinquent in their payments for too long, the effect on the vendor’s revenue can be devastating. This is why many vendors who sell on open terms choose to factor their invoices, to provide a layer of protection for themselves and their open invoices.
If you decide to sell on open terms and are concerned that your customers may not pay on time or at all, factoring is an excellent solution. Non-recourse factoring protects businesses if their customers declare bankruptcy or are otherwise rendered insolvent. In non-recourse factoring agreements, the factor absorbs the risk of all invoices they purchase from you.
Open payment terms can be tricky to negotiate at first, but are an excellent option, provided that the right systems are in place. Vendors must keep track of their cash flow, whether that means carefully timing orders to ensure that payments supplement any deficiencies or, as mentioned, factoring your receivables. Overall, open accounts create a system that allows vendors to expand their client base immensely and keeps customers happy by allowing them ample time to pay.
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