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Payment due concept

Welcome to the Net Terms Economy. This “buy now, pay later” environment is not the most hospitable place for small business owners, and yet, we’re stuck here in a world that can negatively impact our businesses, our industries, and America’s economy.

Explaining the Net Terms Economy

Living in the Net Terms Economy means waiting to be paid—and if you run a B2B business, you are particularly affected. In contrast, in the B2C world, businesses get paid more quickly as consumers make purchases using cash or debit/credit cards.

According to Fundbox, in the Net Terms Economy, a “massive $3.1 trillion” in outstanding invoices is being “held in suspended animation” while small business owners scramble to pay their bills and their staffs.

Net terms is the same thing as trade credit. Today, sellers often have to wait weeks or even months to get paid by buyers, who need their products so they can run their businesses. But since many buyers don’t have the cash on hand to pay for the goods, they’re asking (even expecting) the sellers to offer them credit, and then spend valuable time trying to prove they are creditworthy. Sometimes buyers get favorable terms, while other times they don’t, and they may get stuck with non-negotiable payment terms.

Nobody wins

This is a lose-lose situation. Fundbox explains: “Both sellers and buyers often wind up cash-starved and growth-challenged, with funds hanging in accounts receivable limbo.” Often, buyers and sellers end up with cash flow problems—which can be a death knell to many businesses.

The process turns sellers into “banks” of a sort, first having to assess the risk of extending terms to buyers, then waiting to be paid by them. A comprehensive study of the Net Terms Economy from Fundbox and PYMNTS labeled the problem the SMB Receivables Gap and showed startups, early-stage businesses, and those with thin profit margins were especially impacted.

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That doesn’t mean the news is good for more established companies. Though they can more easily navigate the Net Terms Economy because they have access to credit cards and lines of credit, these businesses are more likely to be paid late—on average about 15 days later than early-stage businesses. And, of course, companies that extend credit may end up with customers who don’t make their payments at all, leaving them with a lot of money tied up in accounts receivable.

So why do it? “To attract customers,” is the reason 55% of the established businesses extend credit terms. Plus, they argue, if they don’t extend terms, buyers won’t be able to afford to buy from them.

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Impact on cash flow

Extending credit can impede cash flow. And many businesses are already dealing with cash flow issues. The PYMNTS report says 56% of American businesses commonly face a cash shortfall. For early-stage, more vulnerable companies, that increases to 66%. And cash flow issues are the primary reason new businesses go out of business.

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