Cash is the bread and butter for any business. For wholesalers, manufacturers, distributors, and other B2B companies, it's vital to manage cash flow closely since retailers typically pay days after orders are delivered. Without a healthy cash flow, your business can suffer and, at worst, be forced to close.
Wholesale is much more complex than selling to consumers and wholesale payment terms are not straightforward. In B2C sales, customers pay upfront or upon receiving a product. In wholesale sales, there is a wide variety of ways your customers can pay.
B2B customers will often seek delayed payment terms to give themselves a window to sell your products and pay you back with the cash end-consumers paid to buy your products. These delayed payments can lead to a diminished cash flow for your business. Without other solutions, your company may be forced to raise prices, require stricter payment terms for future orders, and as a result, suffer weakened relationships with customers.
It makes everyone happier when payment terms are met consistently. Thus, your business needs to understand and successfully manage your wholesale payments terms to ensure that you get paid on time.
To help you manage your customers’ payment better, here are seven essential wholesale payment terms you need to know.
- Extended Terms i.e. Net 30, Net 60, Net 90
- Extended Terms With Prompt Payment Discount i.e. 2/10 Net 30
- Line Of Credit
- Proforma Or Pre-ship
- Advance Deposit
- Consignment Or Sale Or Return(SOR)
- Cash On Delivery (COD)
1. Extended Terms i.e. Net 30, Net 60, Net 90
Extended Terms is the time period that a seller grants their customer to defer payment for their goods or services.
This is represented as Net D, where D is the number of days a customer has to pay your business by, usually after the shipping of goods or when the goods have been delivered to your customer.
The most common terms that are used often are Net 30, Net 60 and Net 90.
How is this term useful?
This is a standard practice in wholesale business.
Wholesale orders tend to be huge. As such, some customers might not have enough cash to pay you immediately after ordering your products. Giving them extended terms allow them to have the opportunity to sell some of their products away to generate revenue to pay you for your goods.
However, before issuing extended terms to your customers, here are some useful pointers that you should take note of
• Confirm with your customers whether the terms start when your business starts shipping the goods to them or when they have received your products.
2. Extended Terms With Prompt Payment Discount i.e. 2/10 Net 30
Extended terms with prompt payment discount is an extension of extended terms. In this case, your customers would receive a discount, a percentage figure of the total order, if they can make the payment before the agreed upon extended payment terms.
This is represented as X/A Net D where:
• X represents the prompt payment discount, in percentage form, offered by the seller
• A is the number of days that the buyer has to pay the invoice to qualify for the discount.
• D is the maximum number of days the buyer has to make the payment to the seller.
For example, if the payment term is represented as 2/30 Net 60, this means that your customers have up to 60 days to pay for your goods and services. However, they would receive a 2% discount on their total order if they make their payment within 30 days.
By giving your customers a discount if they make their payment earlier, this serves as an incentive for them to pay you faster. This will help improve your company’s cash flow if your company can receive payments faster.
3. Line Of Credit
A line of credit is a credit limit that your customer can owe you before they are unable to order from you until they have made the payments they owe you. This term is used for a customer account and not used on an individual order basis.
How is this term useful?
This gives your customers the opportunity to settle their bills over a period of time while continuing to purchase from your business.
When giving your customer a line of credit, your business would generally request your customer to make a minimum monthly payment to continue to use their line of credit. This helps ensure that your business is receiving cash regularly and a good way to check that your customers are in good financial standing.
This term is commonly used by larger companies and not small to medium-sized companies. This is because larger companies have more capital to take on the financial risk involved in giving credit lines to customers.
4. Proforma Or Pre-ship
Proforma is when your customer pays for your products when they are ready to be shipped and upon receiving their payment, your business will send the products to them immediately.
How is this term useful?
This term is especially useful when dealing with first-time customers. This is often used when you are unable to determine your customer creditworthiness and is unsure if your customers can pay for their products. Setting this term for these customers ensures that you receive money for your products.
To help you speed up the process of using proforma, you can link your customer’s credit card to your payment system. This will speed up the process of receiving money from your customers instead of wasting time generating an invoice and chasing your customers to pay. In this instance, you would only charge your customers credit card once you are ready to ship the products out to them.
5. Advance Deposit
Advance Deposit is when your customers put down a deposit (often a % of their total wholesale order) when placing their wholesale orders. They would then pay the remaining order amount once the goods have been delivered or shipped.
By using this term, you ensure that you receive some payment for your products even before starting production. This can help to lower your financial risk in case of events like late payments or payment defaults from your customers.
6. Consignment Or Sale Or Return (SOR)
Consignment is when you ship your products to your customers and they only pay you for the merchandise they manage to sell. Your customers are also entitled to return you any products that are not sold.
How is this term useful?
By selling on consignment, your customer would be willing to purchase your products as there is less risk for them to stock up your products as they only need to pay you if it is sold and can return any unsold inventory to your business.
7. Cash On Delivery (COD)
Cash on delivery, sometimes known as collect on delivery, is when your customer pays for goods upon its delivery rather than in advance.
This payment method is not only restricted to paying by cash but can also include payment by credit card, e-check, wire transfer or online service payment.
How is this term useful?
While this is not a common term used in wholesale, sometimes COD can serve as the middle ground between a buyer and wholesaler’s interest. Buyers tend to prefer to buy on credit, but a wholesaler might be unwilling to sell on credit due to a lack of resource to follow up with the payment or trust issue. Wholesalers tend to prefer pre-payment, but buyers might not be willing to pay upfront due to trust issues.
In this instance, COD can be used to ensure that both parties benefit with the wholesaler getting paid for their products and the buyer getting the products both at the same time.
Other Wholesale Terms You May Encounter
The wholesale payment terms mentioned above can be used in conjunction with each other and are not mutually exclusive. Sometimes, it pays to think creatively when setting your wholesale payment terms when dealing with unique customers or thinking of ways to increase sales.
For example, if you have a customer who places a large order, you can be more flexible with your payment terms by allowing them to pay half the balance at 30 days and allowing them to pay the other half 60 days later. This will provide them additional time to pay you back as they are making a large order from your business.
Which Payment Term Should I Use For My Wholesale Business?
There is no one fixed methodology for deciding payment terms. It will depend on your brand, your products, and who your customers are. For example, if you are selling to bigger companies, they will tend to have more bargaining power and will negotiate for longer payment terms. Companies like Amazon and Wal-mart typically pay on a Net 30 basis, and it's very unlikely you would be able to negotiate better terms if you are a small wholesale business.
Have a good understanding of the financial benefits and disadvantage of each payment term and calculate the risk of each term carefully before using them. Also ensure that your sales team is working in collaboration with your finance department. Your finance team needs to help your sale team understand what terms are feasible or unfeasible that can be offered to your customers.
Worst-case scenario, you may find yourself in a position where you need capital for your inventory, to produce stock and replace the goods you have sold. So you’ll need to negotiate better terms where possible. More importantly, have backup plans for when your customers on terms pay late. Short term loans and/or invoice factoring are options if you reach that point.
As you can see, managing wholesale payments can be tricky with each customer having their different payment terms. If you need help managing your customer’s payments, Sweet can help you. Sweet is an inventory and order management platform that can assist you when dealing with customers payment. With Sweet, you can get paid faster by optimizing your payment workflow.
To find out how Sweet can benefit your wholesale business, request a free demo today.