Updated: Aug 27
In Business to Business (B2B) transactions, it’s very common for the seller to have payment methods that allow the buyer to pay for goods and services sometime after the invoice date. This practice is often referred to as “net payment terms” - referring to the option to pay for the invoice 7 - 90 days (or more) after the issue date.
In essence, the supplier extends a form of short-term credit to their buyer's account, lowering the cash flow burden for the buyer and giving them time to add value to the goods and sell them on to the next layer in the value chain.
Why are payment terms offered?
As reported by our partner Atradius, 60% of B2B sales are made on credit in the construction materials industry. The main reasons for businesses in this industry and elsewhere to provide trade credit (or the ability to pay 15 - 90 days later) and support their business buyers are the following:
to encourage sales to existing customers (60%) or
to win new customers (24%)
Payment status in different industries - Length of payment terms
The length of payment terms varies from industry to industry and is often related to how long it takes for the buyer to have processed the goods and passed them to their own buyers.
For example, in the consumer durables industry, short payment terms are standard, whereas, in construction, more than 50% of the payment terms are > 30 days to complete and sell items to customers (see picture).
Credit risk - The need to manually approve buyers
Although net payment terms by default are common in most industries, most companies don’t automatically extend payment terms to all buyers, certainly not on the first interaction. Instead, most businesses require buyers to build up a track record of on-time payment behaviour.
After paying the first invoices in advance, buyers can gradually pay larger amounts on longer terms as trust builds. Given the desire of many businesses to grow, they’ve come up with a process to not only allow existing customers to pay on invoice with a payment term but also allow new buyers to do so.
Our research of more than 500 B2B companies has uncovered several elements pieced together in what we call “manual payment terms”.
Manual steps in PBI - From credit check to invoice factoring
Although the processes that companies use for payments by invoice often vary, they commonly entail the following manual steps:
When a new buyer requests to pay with Net Terms, the finance team will conduct a credit check and check the company's social media page to verify if the business is real, hoping to achieve a high acceptance rate.
If approved, a credit limit is issued to the buyer, which is often logged in the Enterprise Resource Planning (ERP) system (or a spreadsheet) to cap the potential exposure to the buyer.
When a buyer places an order, there is a check if the order amount doesn’t exceed the credit limit and if there are not too many overdue invoices from the buyer.
Handling of invoices, reminders, and working capital
After the manual credit and fraud check, the process continues with the following steps:
When the goods are shipped, the invoice is created and sent to the buyer for payment at the end of the term.
If the invoice isn’t paid within the term, the accounts receivable team will send reminders to the buyer and call them when the money can be expected.
If, after weeks or months, the invoice still isn’t paid, the invoice is sent to a debt collection agency. In cases where the company has credit insurance, 70-90% of the invoice value can be retrieved.
To keep a healthy cash position, invoices are factored, or a working capital facility is acquired. Even mature businesses with a healthy cash position will aim to limit working capital “stuck” in outstanding invoices.
Conclusion - Manual payments are difficult to manage
For most businesses, a best-in-class process contains all of the above elements. It’s diligent and limits exposure to fraud or buyers defaulting on payments. The downside is that a process like the above is cumbersome to start and operationally burdensome to manage.
Balancing growth and risk - The silver line to success
It has taken most businesses we interviewed years to fine-tune the balance between growth (extending more credit to more buyers) and risk (buyers not paying). Therefore, many are reluctant to give up this tried and tested process to save it.
You may compare it to driving a very old car - its fuel economy is terrible, and maintenance costs are high, but at least you know what you’ll get.
Upgrade your B2B payment process with Sprinque
If you want to say goodbye to the inefficiencies of manual pay-by-invoice, Sprinque's B2B payment platform is the right solution for you. Our platform overcomes the challenges above and eliminates the manual, time-consuming tasks associated with traditional PBI, empowering your business with more efficient and profitable payment methods.
Overcome manual workload and increase your conversion
At Sprinque, we overcome the challenges companies face today by addressing the following points:
Automated credit checks: Save time and effort by conducting real-time credit assessments, ensuring your business only extends credit to trustworthy buyers.
Flexible payment terms: Provide B2B customers with customizable net payment terms, enhancing sales and customer retention.
Enhanced cash flow management: Sprinque eliminates the risks of late payments and unpaid invoices, allowing your business to maintain a healthy cash position without relying on invoice factoring or working capital facilities.
Don't let the drawbacks of manual pay-by-invoice hold your business back. Embrace the future of B2B payments with Sprinque and unlock your company's full potential. Experience the benefits of our innovative payment solution today by visiting our website or directly booking a demo and take a step towards more innovative, efficient payments.