For a construction contractor, a Net 30 trade credit program provides a way to build business credit and delay the payment of an invoice for a month. But the hardware store that offers the financing program receives benefits from offering trade credit as well. The hardware store doesn’t just get an opportunity to make a larger sale to the contractor by offering trade credit. The trade credit program also makes it easier for the store to implement accounts receivable automation.
Sending the Invoices
If a hardware store offers Net 30 financing, it won’t need to negotiate trade credit terms with each individual customer and then record the trade credit terms in a spreadsheet. Every member of the program has agreed to the same financing terms. The store won’t have a few customers who have Net 15 terms, a few more with Net 30 terms, and some other customers with Net 45 terms.
These standardized contract terms make A/R automation easier. If a contractor is using Net 30 financing, the store can just configure its trade credit app to send an electronic invoice with a payment date 30 days in the future when the contractor makes a purchase. The invoices will all have the same terms, so the store will know that payment will be required 30 days after the invoice date.
Collecting Invoice Payments
It’s also easier for hardware stores to collect payments from the customers that are in their Net 30 programs. The hardware store already has more information about the business than it would for a typical customer because the business has to apply for access to trade credit. So the store will easily be able to identify delinquent payers, find their contact information, and send them reminders to pay their invoices.
The hardware store can also make the business agree to other contract terms when it signs up for the program, and these terms often include approved payment methods for Net 30 invoices. For example, trade credit users may have to use a credit card to pay their bills instead of using a check that will take longer to arrive. Hardware stores often allow their customers to use additional payment methods when they pay their bills at the cash register, but Net 30 payers may not be given these options.
Recording Invoice Payments
It’s easier for the store to record and reconcile invoice payments when it sets up a Net 30 program. For example, if the store knows that the customer will use a credit card to pay the invoice 30 days after the customer made a purchase from one of its warehouses, it will be easier to identify the payment in bank account records and match it to the purchase.
The store can even have its customers submit invoices in a specific format when they pay their bills so its A/R software can read the invoice data. Grainger does that with its Net 30 program. With this program, businesses can automatically send payments to the hardware store on the due date. At the same time, the businesses also send in machine-readable invoice documents that list all of the items they bought.
Working Capital Management
If a hardware store offers Net 30 financing through a partnership with a bank such as Capital One, as many stores do, then the store is also automating its working capital management. The hardware store doesn’t have to set aside money to purchase new inventory or supplies while it waits for its customer to pay the invoice. Although accounts receivable is considered an asset, it’s not the same thing as cash in the bank or even a share of stock. The store can’t use its accounts receivable to pay for its own purchases directly, it has to turn these assets into cash first.
Capital One’s trade credit programs provide a way around this problem. Instead of extending credit directly to a customer, the hardware store can have the bank manage its trade credit program. When a contractor makes a purchase from a warehouse store, Capital One pays the bill. Then, 30 days later, the contractor sends the payment to the bank. As a result, the hardware store can offer Net 30 terms to its customers while immediately collecting the revenue from in-store purchases.
This financing method works like BNPL for businesses, which seems like a service that would be really popular. Right now, most BNPL apps are marketed to consumers even though businesses that use trade credit would greatly benefit from them. But there might be a reason why it’s hard to find B2B BNPL apps. Net 30 trade credit programs accomplish the same goal. While businesses often use trade credit to delay payment for more than a month, one of Capital One’s hardware store trade credit programs offers Net 50 terms and this indicates that the bank is willing to finance longer-duration trade credit.
Conclusion
For a retail store, Net 30 programs don’t just provide a way to encourage customers to spend more money. They also provide a way for the store to cut costs by reducing its invoice processing expenses. Customers have to apply for Net 30 trade credit and that gives the store additional leverage over them. The store can use this leverage to make its customers use specific payment methods and invoice formats, and these requirements make it easier for the store to automate the accounts receivable process.