Payment terms shape how money flows in and out of your business, directly affecting cash availability, customer relationships, and operational stability. Here’s what you need to know:
- Net Terms (e.g., Net 30, Net 60): These give customers more time to pay but can strain your cash flow. For example, Net 60 delays cash inflows for two months, requiring more working capital to cover expenses.
- Due on Receipt: Immediate payment terms improve cash flow but may deter larger clients who prefer flexibility.
- Revenue-Based Financing: Platforms like Onramp Funds provide upfront capital, repaid as a percentage of sales, offering flexibility during slow periods but at higher costs than traditional loans.
Quick Comparison
| Payment Term Type | Cash Flow Impact | Customer Appeal | Cost Considerations |
|---|---|---|---|
| Net 30/60/90 | Delayed inflows, cash gaps | High for larger buyers | May require borrowing |
| Due on Receipt | Immediate inflows | Low for larger clients | No financing costs |
| Revenue-Based Financing | Upfront cash, flexible repayment | Neutral | Higher fees than loans |
The right choice depends on your cash reserves, customer base, and growth goals. Balancing payment terms with financing options can help you manage cash flow and sustain growth.
Supply Chain Finance 101: Payment Terms, what is 2/10 net 30? $100K+/yr by age 30: simecurkovic.com
1. Net Payment Terms (Net 30, Net 60, Net 90)
Net payment terms allow customers extra time to pay their invoices. Net 30 means payment is due within 30 days, Net 60 within 60 days, and Net 90 within 90 days from the invoice date. While these terms can attract more customers in the eCommerce space, they also pose challenges to cash flow management.
Cash Flow Impact
Longer payment terms can create a cash flow gap, as businesses often still need to pay their suppliers on time, leading to a squeeze on working capital.
Here’s a quick breakdown of how different net terms affect cash flow:
| Payment Term | Cash Flow Impact | Working Capital Requirements |
|---|---|---|
| Net 30 | Moderate impact; commonly used | Requires reasonable capital reserves |
| Net 60 | Greater strain; 60-day delay | Needs substantial working capital |
| Net 90 | Significant strain; longest typical term | Demands high capital reserves; often used in government contracts |
The reality? Nearly half of all invoices issued by small businesses are paid at least two weeks late. This means that Net 30 terms often stretch into Net 45 or more, making cash flow management even trickier.
Striking the right balance between offering competitive payment terms and maintaining enough liquidity is essential for long-term stability.
Flexibility for eCommerce Businesses
Offering net terms can be a strategic move to attract and retain customers. Net 30 is one of the most commonly used terms, offering a middle ground that appeals to customers without overly straining your cash flow.
In B2B eCommerce, where invoice processing can take additional time, offering terms like Net 30 or Net 60 can set you apart from competitors who demand upfront payments. For customers with cash flow challenges, Net 60 provides extra breathing room, but it requires your business to have enough working capital to sustain the delay.
While this flexibility can help grow your customer base, it often comes with challenges in managing supplier relationships.
Supplier Relationship Implications
Extending payment terms to customers may require negotiating similar terms with your suppliers to maintain cash flow balance. However, this can sometimes strain relationships with suppliers.
Suppliers may increase prices by 5% to 8% if payment terms are extended by 15 to 30 days beyond standard industry practices. Open communication and strategic negotiation - like scheduling payments on a specific day each month - can help preserve these relationships.
"Offering longer terms can foster trust and goodwill between business partners, potentially leading to more significant and enduring collaborations." – Jim, General Manager of altLINE
Cost Trade-offs
Extended payment terms come with hidden costs. Between 2019 and 2021, the average duration of payment terms in the U.S. nearly doubled, and they remain about 50% longer than pre-pandemic levels.
For example, offering Net 60 instead of Net 30 means you’re essentially financing your customers’ operations for an extra month. If your profit margins are already slim, this can erode them further. To encourage quicker payments, consider offering early payment discounts like 2/10 Net 30 (a 2% discount for payments made within 10 days). This approach provides flexibility while nudging customers toward faster payments.
Sometimes, paying a bit more to suppliers for extended terms can help avoid cash flow crunches during busy periods. However, the decision should always weigh the cost of holding additional cash against the potential price increases from suppliers.
Finding the right balance is key. Startups with limited reserves may need to stick to shorter terms, while established businesses with stronger cash positions can afford to be more lenient. Ultimately, your approach should align with your business’s financial health and growth goals.
2. Due on Receipt Payment Terms
Due on receipt payment terms require customers to pay as soon as they receive an invoice. While this approach ensures immediate cash flow for businesses, it comes with its own set of challenges and considerations.
Cash Flow Impact
For eCommerce businesses, due on receipt terms offer one of the quickest ways to improve cash flow. When customers understand that payment is expected immediately, it reduces the chance of overdue balances and accelerates the inflow of funds.
This is particularly important given that a QuickBooks survey revealed 65% of businesses spend 14 hours weekly chasing late payments, adding strain to already tight cash flow. Immediate payments can help businesses cover essential costs like restocking inventory, paying suppliers, and managing operations. Compared to extended net terms, this approach provides a more stable financial foundation for businesses with limited resources.
Flexibility for eCommerce Businesses
While the cash flow benefits are clear, due on receipt terms are best suited for specific situations. These terms work particularly well for first-time or one-off clients. For businesses handling single transactions or dealing with new customers, immediate payment ensures financial security and reduces risks.
However, for ongoing relationships or repeat customers, rigid payment terms may not be the best strategy. Flexibility in payment options can help build trust and long-term loyalty. It’s often better to reserve due on receipt terms for high-risk or new clients while offering more accommodating terms to established customers.
Supplier Relationship Implications
Although due on receipt terms strengthen incoming cash flow, they don't automatically improve relationships with suppliers. Separate negotiations are still necessary to align supplier payment terms with your business needs. That said, having faster access to funds can provide you with leverage when discussing terms with suppliers. Setting clear expectations with both clients and suppliers is key to maintaining strong relationships on both ends.
Cost Trade-offs
The immediacy of due on receipt terms can be a double-edged sword. While it ensures quicker access to funds, it may alienate customers who are unprepared or prefer more flexible payment options. Small businesses, in particular, might find these terms inconvenient or even off-putting.
To mitigate potential pushback, focus on clear and professional communication. Present invoices in a way that highlights payment terms upfront and offer multiple payment methods to make the process as smooth as possible. Balancing professionalism with firm payment policies can help you enforce these terms without straining customer relationships.
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3. Revenue-Based Financing Solutions (Onramp Funds)
Revenue-based financing offers a different approach to managing cash flow issues, especially compared to the challenges posed by traditional payment terms. Instead of waiting for customers to pay or navigating complicated supplier agreements, businesses can access upfront capital through platforms like Onramp Funds. This platform specializes in providing equity-free financing tailored to eCommerce businesses.
Cash Flow Impact
Revenue-based financing can provide a quick and flexible solution for cash flow relief. Unlike traditional loans with fixed monthly payments, this model adjusts repayments based on business performance. So, during slower periods, payments decrease, aligning with revenue cycles and easing financial strain. For example, the revenue-based financing market was valued at $901.41 million in 2019 and is projected to soar to $42.3 billion by 2027, growing at an impressive annual rate of 61.8%. Platforms like Onramp Funds can provide capital within 24 hours, ensuring businesses can maintain operations without disruption. A 2024 report highlighted a Community Development Financial Institutions portfolio of $50 million in 2023, expected to double by 2025. This repayment flexibility helps businesses preserve cash for essential operations while still meeting their financing obligations.
Flexibility for eCommerce Businesses
Revenue-based financing is particularly suited for eCommerce companies and startups that already have a steady revenue stream. Onramp Funds, for instance, works with eCommerce businesses generating at least $3,000 in monthly sales. It supports a range of platforms, including Amazon, Shopify, BigCommerce, WooCommerce, Squarespace, Walmart Marketplace, and TikTok Shop. The application process is straightforward, with decisions often made within 24 hours. Unlike traditional loans, which often require strong credit scores and extensive financial documentation, RBF focuses on cash flow and sales history. However, it’s not ideal for very early-stage businesses without consistent revenue or for companies with slim profit margins.
Supplier Relationship Implications
One of the advantages of revenue-based financing is the ability to secure immediate capital, which can improve supplier relationships. Businesses can use this capital to negotiate better payment terms or take advantage of early payment discounts. This approach avoids the potential downsides of simply extending payment terms, which can sometimes force suppliers to increase prices. Instead, RBF allows businesses to maintain positive relationships with suppliers while ensuring they have the funds needed for growth. It also enables companies to diversify their supplier base or stock up on inventory during peak seasons without jeopardizing their ability to meet current financial obligations.
Cost Trade-offs
While revenue-based financing offers flexibility, it often comes at a higher cost compared to traditional loans. Fees can range from 2% to 12% of the advance amount. The effective annual percentage rate (APR) depends on how quickly the advance is repaid, making accurate revenue projections essential for cost calculations. Early on, payments may be lower since revenue hasn’t grown significantly, but as the business scales, payments increase. This dynamic can sometimes limit the benefits of higher revenue growth.
| Feature | Revenue-Based Financing | Traditional Bank Loan | Venture Capital |
|---|---|---|---|
| Repayment Structure | Percentage of monthly revenue (Flexible) | Fixed monthly payments (Rigid) | No direct repayment; Exit required |
| Equity Dilution | None | None | Significant (Often 20%+) |
| Speed of Funding | Fast (Days) | Slow (Weeks/Months) | Slow (Months) |
| Cost Basis | Pre-agreed flat fee (1.2x-2.5x principal) | Interest Rate (APR) | Equity stake, potential preference |
Before committing to revenue-based financing, it’s important to calculate the effective APR based on your revenue projections and compare it to other options like term loans or business lines of credit. The key is to use RBF funds for activities that generate returns exceeding the financing costs. When deployed strategically, this type of financing can complement traditional payment strategies and enhance cash flow management.
Pros and Cons Comparison
Every payment term comes with its own set of trade-offs that can affect different aspects of your business. Knowing these differences allows you to choose the strategy that aligns best with your needs.
Net payment terms provide flexibility that can enhance customer relationships, but they often create cash flow challenges. For instance, offering Net 30 or Net 60 terms means extending credit to customers while still covering your own expenses, which could lead to borrowing and added costs. These terms are particularly attractive to larger buyers.
Due on receipt terms ensure immediate cash flow by requiring payment upfront. This approach is well-suited for smaller or first-time transactions, but it might discourage larger customers who prefer more flexible payment options.
Revenue-based financing, available through platforms like Onramp Funds, offers a balanced solution. It provides upfront capital without requiring you to give up equity, and repayments adjust based on your monthly revenue. This means lower payments during slower periods. However, the downside is that interest rates are generally higher than traditional loans, which could make this option more costly over time.
Here’s a quick comparison of how these payment strategies impact key business factors:
| Payment Term Type | Cash Flow Impact | Flexibility | Customer Relationships | Cost Factors |
|---|---|---|---|---|
| Net 30/60/90 | Negative for sellers; may require borrowing | High for buyers; supports their planning | Can strengthen relationships with buyers | Borrowing costs if cash flow gaps arise |
| Due on Receipt | Immediate cash flow benefit | Low; may deter large customers | May strain relationships with key accounts | No additional financing costs |
| Revenue-Based Financing | Provides upfront capital | High; payments adjust with revenue | Maintains customer relationships | Higher rates than traditional loans |
The main distinction between these options boils down to timing. Net terms depend on the customer’s payment schedule, due on receipt secures funds immediately, and revenue-based financing offers a flexible middle ground.
For businesses with steady revenue streams, revenue-based financing often strikes the best balance. It allows you to manage cash flow effectively while still offering competitive payment terms to your customers, ensuring you have the working capital needed to keep your operations running smoothly.
Conclusion
How you set up payment terms can have a major influence on your business. Options like Net 30 or Net 60 might help you build stronger relationships with customers, but they can also lead to cash flow challenges that may require outside financing. On the other hand, terms like "due on receipt" bring in cash faster but might make it harder to attract larger clients who expect more flexibility.
Experts in the field emphasize this balance. Kristine Darroch from eCapital Corp highlights:
"Payment terms can make or break a sale. Consequently, businesses need to balance the cash flow and risk impact of higher days sales outstanding (DSO) with the ability to reach more customers and sell more goods or services".
To align your payment terms with both cash flow needs and growth objectives, consider solutions like revenue-based financing when faced with extended customer payment cycles or tough supplier terms. This approach can fill cash flow gaps, allowing you to offer competitive terms to customers while keeping your operations running smoothly.
Jeremy, the founder of Kindfolk Yoga, shared his experience with this type of financing:
"Onramp offered the perfect solution with revenue-based financing to secure the capital we needed to invest in inventory and pay it back at a reasonable time frame once we made sales. The process was quick, easy, and the support was great."
Ultimately, refining your payment terms creates a strong foundation for growth. Whether you're negotiating with suppliers, setting up customer agreements, or exploring financing options, the priority is ensuring liquidity to support growth and maintain solid partnerships.
Businesses that take a strategic approach to payment terms and embrace flexible financing options are better equipped to handle economic challenges and scale effectively.
FAQs
How can businesses handle cash flow issues caused by extended payment terms like Net 60 or Net 90?
Extended payment terms like Net 60 or Net 90 can put a serious dent in cash flow. While you're waiting for payments to roll in, your expenses keep piling up. One way to handle this is by considering revenue-based financing, which ties repayments directly to your sales. This method helps keep your cash flow steady, ensuring you can cover costs while still planning for growth.
For eCommerce businesses, platforms such as Onramp Funds provide financing options specifically designed to cover these cash flow gaps. This allows sellers to invest in essentials like inventory or marketing without putting their operations at risk.
What are the advantages and challenges of revenue-based financing compared to traditional loans?
Revenue-based financing allows for repayments that adjust with your sales, meaning you pay more during busy times and less when business slows down. This approach also offers fast access to funds without the need for collateral or personal guarantees, which makes it a great option for eCommerce businesses looking to grow quickly.
That said, there are some trade-offs. The total cost can be higher than traditional loans, as repayment percentages can accumulate significantly over time. Plus, the funding amounts are usually smaller compared to what you’d get from a traditional loan, which might limit how much capital you can secure at once. It’s important to take a close look at your cash flow and growth plans to decide if this financing method fits your financial strategy.
How can businesses manage cash flow effectively while maintaining strong customer relationships with 'Due on Receipt' payment terms?
Managing cash flow efficiently while keeping customer relationships intact requires clear and open communication about payment terms from the start. One strategy that works well is offering early payment discounts - this not only motivates customers to pay on time but can also be a win-win for both sides. On top of that, addressing any billing issues quickly and maintaining a professional, customer-first attitude goes a long way in building trust and fostering loyalty.
