How to Handle Tailored Payment Terms in B2B Ecommerce
One major difference between B2C and B2B transactions is their approach to payments. In B2C transactions, the process is straightforward: the customer selects a product, pays immediately, and the transaction is complete.
B2B payment processes follow a different model. Businesses don’t always pay upfront. Instead, many B2B deals involve deferred payment arrangements that allow buyers to settle their bills over time. These arrangements, known as payment terms, can vary significantly based on factors like the nature of the business transaction and the relationship between the buyer and the seller.
In this guide, we’ll explore the most common payment terms in B2B ecommerce, explain why it’s important to tailor them to different clients, and show you how to structure them to maximize value for both your customers and your business.
What Are B2B Payment Terms?
B2B payment terms are the agreed-upon conditions under which one business pays another for goods or services rendered. The terms outline when payments are due, how much is payable, and any additional conditions, such as early payment discounts or penalties for overdue invoices.
Well-defined payment terms also serve as a legal framework that formalizes the financial relationship between the buyer and seller. They can also help build and sustain trust and transparency between the transacting parties.
What Are the Typical Payment Terms for B2B in the US?
Some of the most common payment terms for B2B ecommerce in the U.S. are net terms, installment plans, milestone-based payments, cash on delivery, cash in advance, and line of credit. Let’s look at what each type entails.
Net Terms
Net terms are arguably the most prevalent payment terms in B2B. These terms give buyers a specified period (e.g., 30, 60, or 90 days) to pay after receiving an invoice.
Milestone Payments
Often used in large contracts or projects (particularly in industries like construction or software development), these B2B payment terms break down payments into segments based on different project stages or delivery points. Upon achieving each milestone, the corresponding payment portion becomes due.
For instance, a software development company might receive 30% of its fee upfront, 40% upon completion of the product’s beta version, and the final 30% after the final delivery and client acceptance.
Installment Plans
Instead of a single upfront payment, installment plans divide the total amount due into scheduled portions. A typical arrangement might involve the buyer making 50% of the payment upfront and the remaining 50% upon delivery or completion.
Cash on Delivery (COD)
As the name suggests, cash on delivery requires the buyer to pay at the time of goods delivery (that is, when the customer receives the goods or service). COD is less common in ongoing B2B relationships but might be used with new or higher-risk customers.
Cash in Advance (CIA)
With cash in advance terms, buyers must submit full payment before the seller initiates shipment. Like COD, this is typically reserved for new business relationships or transactions with higher financial risk.
Early Payment Discounts
To incentivize faster payment and improve cash flow management, sellers might offer discounts for early settlement of invoices. For instance, an arrangement like “5% 10 Net 30” means the buyer receives a 5% discount if they pay within 10 days of the invoice date, while the full amount remains due within 30 days. These discount terms can be a win-win, providing buyers with savings and sellers with quicker access to funds.
Line of Credit
In some B2B relationships, particularly those involving repeat customers, the seller might offer the buyer a pre-approved credit line. This allows the latter to make purchases on credit up to a set limit and pay off the balance periodically (typically monthly or quarterly) according to agreed terms.
Why Tailored Payment Terms Matter in B2B
Some B2B businesses use standardized payment terms, such as Net 30, for all their customers, and for good reason. Standardized terms are simple to manage, reduce administrative complexity, and offer predictability. But is this always optimal? Not necessarily.
Offering standard terms overlooks individual buyers’ diverse financial realities and operational cycles. While it can streamline internal processes like invoicing and accounts receivable (AR), it can lead to missed opportunities and sometimes even strain customer relationships.
In contrast, tailored payment terms involve customizing the payment schedule and conditions offered to individual customers or specific customer groups based on various factors, such as creditworthiness, purchase history, order volume, or the length and strength of the business relations.
This personalized approach in B2B delivers several strategic advantages:
- Stronger client relationships: Customizing payment terms demonstrates an acknowledgment and understanding of your customers’ unique needs and business cycles. That makes them feel valued, builds trust, and can cultivate long-term loyalty.
- Potential for higher sales and order volume: Offering better payment flexibility through tailored terms can help you stand out in crowded sectors or industries. Moreover, clients are more likely to make larger or more frequent purchases when payment terms align with their financial capabilities or cash flow. In a report by Cebr and iwoca, two-thirds of B2B sellers reported increased sales after implementing flexible payment terms.
- Reducing later payments and defaults: Rigid payment policies that don’t consider a buyer’s specific circumstances or business realities can inadvertently lead to late payments or even defaults. Tailored terms make sure customers receive conditions they can realistically meet.
- Supporting global expansion: B2B payment norms vary by region. What is standard in one country might be unusual or even bizarre in another. Customized terms help you adapt to these international market nuances. They allow you to offer payment options that are familiar and comfortable for buyers. Such flexibility can help facilitate smoother entry into new markets and improve your competitive positioning.
Factors to Consider When Tailoring B2B Payment Terms
Developing customized payment terms requires strategic evaluation of multiple factors to balance customer needs with your business’s financial stability. A poorly designed approach can create cash flow issues and operational inefficiencies.
Here are some key elements to evaluate when structuring customized payment agreements.
Buyers’ Creditworthiness
Begin by thoroughly assessing the client’s creditworthiness. Review their credit score, financial health and standing, and overall reputation in the industry.
Clients with a less-than-stellar financial record may require conservative or stricter terms, like cash in advance or shorter payment cycles (like Net 30). Those with excellent credit profiles and a strong industry standing or reputation may be eligible for extended terms like Net 60 or 90, or other flexible arrangements.
Relationship and Payment History
The length and strength of your relationship with a client should also influence the terms you offer. New customers might be subject to stricter terms, such as shorter net periods or even initial upfront payments, until a reliable payment history is established.
In contrast, you can reward long-standing clients with a proven track record of timely payments with more flexible terms, like extended Net 60 or Net 90 options, or even a line of credit as a sign of trust and appreciation for their loyalty.
Size and Frequency
The size and frequency of a customer’s orders can also be a determining factor. To incentivize continued business, you might offer large or repeat customers extended terms, like Net 60 or installment plans for substantial purchases. Smaller or one-time buyers might get more standard terms, like Net 30, to manage risk.
Industry Practices
Research the typical payment terms prevalent in your specific sector or customer’s industry. Aligning your terms with these industry norms can make your offers more competitive and acceptable to buyers.
How to Structure B2B Payments for Your Store
Looking to create a sustainable payment structure for your B2B ecommerce store but don’t know where to start? Here’s a practical step-by-step guide.
Understand Your Business and Customers
Assess your own financial needs and operational cash flow. Determine the average time you can comfortably wait for payment without impacting your business operations, including your ability to cover expenses and invest in growth. Consider your envisioned B2B ecommerce ROI and the potential impact of payment delays.
At the same time, thoroughly analyze your customer base. Segment them by industry, size, purchase frequency, and creditworthiness. This segmentation will be crucial for determining appropriate payment terms for each group or category.
Create a Default Payment Term
Establish a default payment term (e.g., Net 30) to provide a baseline. This default payment term can act as a starting point for negotiations with customers and ensures that even without customizing terms, there is a clear expectation for when payment is typically due.
Create Terms for Each Customer (or Customer Group)
Use the insights gained from your research to develop tailored payment terms for individual customers or specific customer groups. Make sure to document the terms clearly in the customer’s account settings or contractual agreements.
Make Payments Easy and Transparent
The easier you make it for customers to pay, the faster you’ll get paid. Complex or cumbersome payment processes can lead to payment delays and frustration.
Offer a wide range of B2B payment solutions and options (such as bank transfers, credit card payments, debit cards, digital payments like online wallets, wire transfers, and even traditional paper checks where possible) to accommodate different preferences and streamline the customer experience during checkout.
Automate invoice generation to save valuable time and reduce administrative overheads. For example, B2B businesses report saving 5-10 hours weekly by automating billing.
Additionally, provide an easy-to-access customer portal where customers can view invoices, payment statuses, outstanding balances, and due dates. This ensures buyers have all the information they need to pay on time and can also help you avoid any payment-related disputes.
Enforce Late Payment Policies
Despite your best efforts, some customers may still pay late. According to a survey by PYMTS, 51% of businesses report that their average payments arrive after the due date. Additionally, 57% of all invoices are paid late, with up to 33% taking over 90 days to settle.
To mitigate this issue, it’s crucial to have clearly defined late payment policies and enforce them consistently. This includes outlining potential penalties, such as overdue fees or interest charges, in your contract terms and making them visible on invoices.
Additionally, implement automated reminders as invoice due dates approach and establish a clear workflow for manual follow-ups on overdue payments. If necessary and as outlined in your policies, limit future orders or require upfront payments from consistently late customers.
Regularly Review and Adjust Payment Terms
Your payment terms should not be static. Regularly evaluate their effectiveness by monitoring key metrics like days sales outstanding (DSO) and late payment rates. Benchmark against industry norms and solicit feedback from your clients.
Use these insights to refine your payment strategy over time, ensuring it remains aligned with your customer needs and business goals.
Final Thoughts: Handling B2B Payment Terms for Ecommerce
While there are several types of B2B payment terms, none are inherently better than the other; each has its place depending on the nature of your business and the profile of your clients.
Your ultimate goal should be to offer your clients tailored terms that balance flexibility and convenience with risk management.
k-ecommerce’s ERP-integrated B2B ecommerce platform provides you with all the tools you need to define, customize, and enforce payment terms for your B2B customers. With k-ecommerce, you can tailor terms for different customer segments, automate invoicing, integrate multiple B2B payment methods, and easily track payment schedules.
Request a free demo of k-ecommerce today to discover how we can help you establish effective, tailored B2B payment terms that support your clients and your business’s growth.