Majority of businesses offer trading terms to their customers. This is especially true for B2B companies. We found that 81% of customers are offered trading terms by businesses.
In most instances, when you offer trading terms to customers, you are essentially offering to be their bank for the 30, 60 or 90 day period. Agreeing to finance their cost for the term period.
As most businesses tend to offer trading terms, we will leave the debate of whether you should offer trading terms in the first place for now.
Instead, we dived into the numbers to ask the question: What is the idea trading term days I offer to my customers?
What we learnt seems to be counter-intuitive. Get paid faster and improve your cash flow by:
- Offering 7 day terms to customers rather than no terms
- Extending trading terms from 14 days to 21 days
From our number crunching of 300,000+ invoices:
- if you offer 7 day terms, on average you get paid in 18 days. This is a full month (33 days) faster than payment from customers that were not offered trading terms - they paid in 51 days
- if you offer 21 day terms, on average you get paid in 29 days. This is 4 days faster than customers who get 14 day terms, as they pay in 33 days on average
But, if you currently offer 30 day terms to your customers, increasing your payment terms to 45 days or 60 days won’t improve your cash flow. Customers offered 30 day terms generally pay in 40 days, compared to 44 days and 51 days payment by customers offered 45 and 60 days respectively.
Whilst the stats show that on average, increasing terms offered to customers actually improves your cash flow, you should consider if this applies to all your clients. For example, if you know that a customer is bad credit, you should probably not offer terms. In fact, you should probably get pre-payment before you start work!
Are you game to try this out? We’d love to get feedback on whether this strategy worked for you to improve your cash flow.
P.S. You can use Vistr to forecast when each customers will pay outstanding invoices. We built algorithms to do this automatically and give you a great view to see if you have enough cash to power your business in the next 3 months.
This blog post was initially featured in our LinkedIn posts