What is Net 90 Payment?- Definition
A net 90 vendor account refers to how long a supplier or vendor gives you to make your payment. When a vendor approves you for a net 90 account, it means you don’t have to pay for the goods or services your company receives until 90 days from your invoice (though you might be offered an early payment discount if you make your invoice payment sooner).
Understanding Net 90
The term Net 90 means that a merchant expects to receive payment in full from a buyer within 90 days. Only the largest businesses with many revenue sources can afford to have such long payment terms without interest. Be wary of clients who demand 90 days to pay because it could mean they have cash flow problems and you are putting yourself at risk of not getting paid. And if you plan on offering 90 days as an incentive to get more customers only to factor the invoices you should consider that net-90 invoices are much harder to factor in. The fees are more expensive and it’s harder to find a factoring company willing to take them.
Advantages of Offering Net 90 Credit Term
There are many reasons to offer net terms (also referred to as trade credit), from attracting new clients, growing your business, adding a competitive advantage to building customer loyalty.
Generate more sales
Offering net terms will allow customers (typically small businesses) to purchase who otherwise wouldn’t. When payments aren’t due immediately, barriers to purchasing go down. These small businesses are generally more willing to buy on credit. Some customers may depend on credit for all of their purchases. Offering net terms ropes in some of these customers. It’s important to outline your specific invoice payment terms on all invoices. If you are offering longer payment terms, specify the invoice amount, the payment due date, and payment options. Note that net terms are usually offered interest-free.
Gain an advantage over competitors
As a stable larger business, your business will have an advantage over competitors who don’t offer net terms. If it is common for some industries to offer net terms, not offering them puts a company at a disadvantage. New clients will gravitate toward the path of least resistance for purchasing anything. This means purchasing on credit even if there’s the possibility of incurring late fees.
Build customer loyalty
Giving customers some leeway will help build customer loyalty. Net terms can be a door to new customers. New customers come in for free financing but if the company can provide good customer service, quality products, and competitive pricing on top of net terms, it can build strong loyalty with customers.
Net terms alone may provide some customer loyalty but if competitors are offering the same terms, a company will need to provide an edge (as mentioned above) to keep customers loyal.
Coupling net terms with an incentive for early payment may be just that edge that you could leverage to keep your customers loyal. Early payment plans are not only a great way to gain customer loyalty, but it also provides an opportunity for you to receive full payment of your accounts receivables sooner.