The standard convention for credit terms has always been net-30. It provides your customers with enough time to pay but also allows you to receive payment within a reasonable amount of time. It seems to be the best option for all parties. Or is it? Though it is true that most businesses operate on net-30 credit terms, there is nothing special about it that makes it the best option for every situation.
Why not experiment?
What is wrong with net-20, or even net-25? Many businesses are reluctant to make the switch to these terms, but why? Every business is different. Every customer is different. It seems improbable that one credit terms could make the most sense for every situation. The only way you can find out what credit terms are right for you or right for a certain customer is by experimenting and trying it out. You may find that net-20 works better for certain customers but that sticking with net-30 makes sense for others.
Create a sense of urgency
By forcing your customers to operate on a quicker payment cycle, you can create a sense of urgency that puts payments to your business above others. By shortening their credit cycle, they know you mean business and are less likely to tolerate late payments compared to other businesses they may owe money to.
Know problems sooner
If you were to switch from Net-30 terms to Net-20 terms, you would essentially be moving the payment process up 10 days. This means you will know your customers is late paying 10 days sooner. One of the most important factors in collecting debt is time. The less time that has passed between sale and collection, the easier it will be to get paid.
Obviously, there are also drawbacks to switching up your credit terms. Some customers may be resistant to any change they see as possibly negatively impacting their business. You may also find that net-30 works best for your business. The point is not that net-30 is bad, the point is that challenging the status quo is how you improve your business. Let us know what your opinion is. Do you operate on net-30 terms or do you mix it up?
When vendors ask me for shorter terms, it’s a problem. I usually request an extension at least to the standard 30. For one thing, if a vendor dates his invoice the first of the month and mails it, I might receive it on the 7th or 8th; so I’ve already lost a full business week from their origin date, and then it’s due in a (business) week and a half? We will be chronically late, and that’s bad. I have a lot of tasks and responsibilities beyond paying bills with short fuses.
Thanks for the response! We encourage vendors to always work with their customers before changing payment terms. Though it may be better for them to get paid sooner, if a customer is going to be stressed and unable to comply, it helps no one.