Culture in the business-to-business world has dictated a customary practice of offering buyers net 30 terms or even longer. Giving buyers 30 days is the same as borrowing money at interest for 30 days. Maybe a business has enough cash sitting in their bank account, but the slow speed of collecting money owed on invoices has an actual cost. Many suppliers offer a net 10 or 1 or 2 %. They are saying that the cost of money not collected quickly is 1 or 2%. Buyers know all too well the advantages for themselves of delaying payment.
There is also a cost to creating invoices and pushing them out to buyers. There are hard costs such as mailing, postage, paper, printing, labor time tracking credit risk. Hard costs grow higher when invoices have to be resent out or even higher when internal or external collection efforts need to be employed.
In actuality, the Days Sales Outstanding has been reported to be 45 days on average. That means suppliers are not collecting in 30 days but more on average of 45 days. It also means that this being an average, some invoices are not collected until 60 or even 90 days out. Financing receivables with a line of credit raises the cost of not collecting on invoices to 2.5%.
Many businesses do not calculate the cost of net terms or the actual labor costs make this calculation somewhat nebulous. So, the actual cost of money not received could be higher than 2.5%, and the cost of frustration, which is never calculated, can bring it higher yet. What if a business had money in the bank earning interest? That lost income could bring costs of carrying receivables higher to 3.5%.
What is the cost of credit card processing? 2.75% to 3% is a good average for most companies. However, it can be brought lower with a process called Level 3 processing. Electronic Money Company has helped many suppliers save on average .75% on their credit card processing fees, lowering overall fees easily down to 2.25%. Read our FREE report, Secrets of B2B Credit Card Processing.
