Wednesday, July 6, 2016

Is Net 90 The New Norm for Payment Terms (or, Are Small Businesses Now Banks?)

I've been running my small business now for over 20 years.  One thing I'm finding is that payment terms are changing... changing in the sense that the customer is making their own rules.

The main trend seems to be customers setting their own payment terms.  This is something I have not seen in the past very often, but it is becoming much more frequent.  And the main problem is the length of the terms they are asking for.

Even in the case where our quotes and invoices clearly state "Net 30" for the terms (which we feel is much more than fair), we see POs come in with Net 45, Net 60, Net 90 or even higher.

"We even have received a payment from one customer that gave themselves a discount for paying in less than 45 days.  They actually gave themselves a discount."

We even have received a payment from one customer that gave themselves a discount for paying in less than 45 days.  They actually gave themselves a discount.  This was straightened out in the end, but this really got me thinking...

If I walk into McDonalds, order a Big Mac, eat it and then walk out and tell them "I'll pay you in 90 days".  Or better yet, if the total was $5, I can't give them $3 because I paid before my own decided payment terms of net 90.

I think this pattern of having companies not only set their own terms, but lengthening those terms to over 30 days says a lot about the actual state of the economy.

In a sense, when payment is held for many days, the small business and provider of the product is, in a sense, becoming a bank.  The customer is literally borrowing money for that time period from the business or vendor at zero percent interest.  But at the same time, while that money is being "floated", they are making interest on it in most cases.

I'm sure if we, as small business owners with our payments held "hostage", started adding on late fees, finance charges, and/or charging interest that may help a little with the expedience of payment, but then you will need to hire another part time employee just to chase down these fees as well.  And then the "games" begin making business transactions so complicated it is just silly.

Filling out multiple vendor setup forms with duplicate information on each (as well as providing a W9) tells me that there really is a need that could be met by setting up an electronic vendor setup and payment system.  When 7 out of 10 companies request all of this information on paper whether it is faxed or scanned an emailed, it makes me think how far behind accounting really is in this digital age.

It's almost as if we are still treating the AP department like they are handwriting checks.  Add that on top of most wanting to float the payments for more than 30 days and I could see how it may be virtually impossible to print a check in less than 60 days to begin with.

When I get my bills, I pay them before or the day they're due.  Why should this be any different?

I'd love to hear from other small business owners seeing this same trend, and how you're dealing with it, if at all.