Why Are Business Payment Terms Stuck In The Twentieth Century?

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Keith Smith is co-founder and CEO of Payability, which works with suppliers to accelerate payments from online marketplaces, giving entrepreneurs the working capital needed to grow their businesses. Previously, Keith founded and ran multiple startups, including; CyberMortgage, Zango, and BigDoor. Keith lends his time to early-stage startups via Techstars and serves as an adviser, investor, and board member for multiple tech startups.

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Trade credit started as a way for vendors to purchase necessary business supplies “on account” from a supplier. The root for the word “credit” is credo, Latin for “I believe.” Believing that providing goods on credit would help grow those vendors’ businesses (and thus increase future orders), suppliers extended payment terms to their business customers. This enabled the vendors to assemble and sell their finished goods before paying for the supplies—then repay the suppliers within a given period of time.

This model is similar to the way a modern consumer makes purchases on a credit card. We get the goods now, and pay for it a month later when the bill comes, plus interest. At some point in the evolution of credit, the standard payment terms for purchasing on account became 30 days.

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In the past, a Net 30 timeline was fair to all parties. Suppliers wanted to build good relationships with their business customers and those customers needed extra time to sell their goods and earn the revenue to pay their suppliers. Suppliers mailed out invoices. Business customers mailed back a check within the month. It seems clunky now, but this system worked for centuries.

Fast forward to 2016. Technology now allows businesses to receive revenue for goods and services immediately, electronically, and on multiple platforms. But modern suppliers—especially freelancers, app developers, and publishers—are still getting paid on archaic Net 30 (or worse, Net 60 or 90) terms.

With no shortage of online marketplaces to sell their goods and services, publishers and developers can now afford to be more choosy about the businesses with whom they’ll work. They can expect faster payment terms. So I can’t help wondering: Why is Net 30 still acceptable?

I believe there’s ample opportunity and a market need to pay suppliers weekly. There’s available technology that allows us to pay our suppliers faster and help them provide the same value throughout the supply chain that larger companies with more leverage have enjoyed for ages. Most importantly, I believe businesses that cultivate better relationships with their suppliers—helping them grow their own businesses—will see an even higher return on that initial advanced payment.

If you want to know more about what Keith Smith does and how Payability helps companies to be more efficient with their revenue stream visit their website.