Hey all— the response to my previous post was quite positive and I got a lot of value out of the discussion. So, I’m going to try to add on to that content periodically but in smaller bits (single topics), rather than a giant ‘listicle’. Let’s be honest— who actually read all of that in one go? Anyways, I’ll start abbreviating the latter half of the title as HBMMDB going forward.
Link to Original Post: How to Build Multi-Million Dollar Brands
Today’s Topic: Give Your Customers Net 30 Terms (and why you don’t have to get fucked (if you don’t want to))
Your B2B customers are likely to ask you for Net Terms. Big customers definitely will. You’re likely to be hesitant to comply (rightfully so), but what if I told you that you can…
- Give your customers Net30, Net60, or even Net90 terms, AND
- Still get most of your money up-front, AND
- Make extra money offering Net Terms, AND
- Offload the risk of non-payment onto someone else
To many of you, this sounds to good to be true. Others of you aren’t familiar with net terms. A handful of you big dogs in here are doing exactly this, already.
Disclaimer: None of this post should not be taken as financial or legal advice, I do have a finance degree that I never put to work directly (I really hate wearing suits).
And before we get into it, a bit about me in case you missed the last post—
I started my hemp business less than 2 years ago with my last $20k. Now we’re moving ~$750k in product a month (retail value) at gross profit margins of ~80%. We don’t grow and we don’t extract. We package product, brand it, market it, and distribute to 750+ retail stores in the south & midwest. We have 2 brands, soon to be 3 next month, and 4 the month after.
What are ‘Net Terms’? Net Terms are the option of a customer to pay an invoice after the date of purchase / delivery. An invoice that shows ‘Net 30’ as the payment terms means the customer gets 30 extra days to pay. You can often convince an established supplier to ‘give you terms’ after demonstrating your ability to pay on time. And you should ask for it— it’s great for cash flow.
There is a LOT more business debt in this economy than is tracked & recorded because of Net Terms. It’s this sort of ‘dark liquidity’ that’s been lurking around for a long time, but is lately gaining the attention of silicon valley startups, and thus the press, and thus your customers.
Another word for net terms is ‘tradelines’. Some suppliers report tradelines & associated payment history and these contribute to your business credit. Many will look at you funny if you ask them to report your tradeline for your credit’s sake.
What most smaller businesses offering Net Terms don’t realize is that you can ‘finance’ the invoices you give terms on. This is called ‘invoice factoring’, or, ‘selling your receivables’.
Here’s how it works: you sell something to a business on net terms → you email your invoice to a factoring company → factoring company advances you most of the money, less a small fee → your customer pays the factoring company the value of the invoice on or before the due date → the factoring company pays you the rest of the invoice (what they didn’t advance to you).
Your customers get to pay later and you still get most of your money up-front (up to 90%).
Right now, I’m paying just 2.4% to factor my invoices Net 30. That’s less than what most of you are paying for credit card processing. But this isn’t some special rate I qualify for— it’s just what my factoring company charges.
Now, depending on the state your business is filed in and what state laws govern your customer contracts, you may be able to charge your customer extra for the ‘extended payment terms’ (make it a line item on your invoice). In my state, I can. I charge varying fees depending on state usury laws (ask your attorney).
Sometimes I charge more than it costs me, and sometimes I waive the fee— I just try to break-even here. You can certainly make it a profit center. I’m not here to judge you.
The last thing to consider here: who is at risk if the customer does not pay?
The answer depends on your financing company. I searched and searched for an invoice factoring company who would accept hemp & cannabis clients. I finally found one. The terms / fees sounded good until I got the contract—they were going to charge me outrageous fees for my customers late payments and mis-payments (payments directed to me)!
But worse than that, they wanted me to sign away all of my business AND all of my personal assets as collateral!
Please, please, please do not sign up for anything like that. It is shark-y AF. One big invoice could go unpaid, you could struggle to cover, and they could fee you to death and take everything you have to your name.
This is what we call ‘recourse’. Mortgages have recourse clauses and so do auto loans. Often they’re this stiff.
But there is non-recourse invoice factoring available. That means if a customer doesn’t pay, you keep your advance on the invoice but don’t get the rest. The factoring company takes the rest of the hit (the advance). And you continue factoring all other invoices as normal.
Any non-recourse factoring company is going to want to qualify your customers, as they should. Someone needs to qualify these customers. And I mean legitimately— not just you deciding they’re good because you’re drinking buddies with them and they’ve never failed to pay you on time. I mean credit checks and other serious underwriting practices.
With a good factoring company, you can have the customer apply for the ‘line of credit’, or you can apply for it for them in the background. Either way, a good factoring company won’t ding their credit with the check. And they won’t check personal credit— just business.
You should not be blindly holding this risk on your books with little to no diversification. You are not a bank. You sell products / parts / services. You need a non-recourse factoring company, or you need to collect up-front. Period.
Get this in place and you will get more new customers, they will spend more money, and you will reduce your risk!
What you want: Low Fees (<3% for Net 30), Cannabis / Hemp Approved, High Advance Rates (80%+), and Non-Recourse Terms (bulk of risk is on factoring company).
There are LOADS of these companies out there. Finding the ones that tick those boxes is tougher.
I wouldn’t go to any that say they specialize in Cannabis or Hemp. They will just tell you it’s ‘high-risk’ and charge you extra. That’s true in merchant processing but not as much here.
If you want to apply for my factoring provider, you can DM me for their URL. If you want an actual invite & don’t mind me getting an Amazon gift card, DM me your email address & website and I’ll get you an invite.
If you qualify, you will get a free trial to credit check some customers (without notifying them). $50/mo after trial gets you 5 credit checks per month, which are normally $10 each. If you have a lot of customers, you will want the $200/mo plan because it gets you lower fees (2.4% vs 2.6%) and you will probably use the extra credit checks.
Alternatively, you can just google ‘invoice factoring’ or ‘sell my accounts receivables’. Watch out for sharks!
I can tell you from working in the retail channel, most established stores have net terms with their beer, liquor, and candy distributors. They don’t get terms with most ‘novelty’ distributors. It’s a big differentiator.
Still, some customers won’t take advantage because they have moral / ethical objections to debt.
Lastly, if no one has ever asked you for terms / extra time to pay, you probably don’t need to worry about this.
Happy to answer questions as time allows! Please ask non-private questions in this thread so all readers can benefit.