B2B payment terms: the need for a scalable risk model
Jessica Nemeth is the Product Manager at Terms.Tech, a cutting-edge European B2B flexible payments solution. Jessica provides insights from AREA42’s report, ‘European SME Landscape 2024’ and adds her analysis on the evolving state of B2B payment terms.
AREA42 has recently released the insightful new report, ‘European SME Landscape 2024’. Amongst other topics, the report shows how European SMEs approach payment terms, as determined via a survey of over 400 SME leaders (C-suite, founders, owners).
What are the insights about payment after delivery?
We learn that businesses which mainly and strictly focused on B2B selling use payment terms 72% of the time. The report also unveils that +/- 30 days is the most popular term for B2B sellers – strictly B2B sellers offer +/- 30 days 44% of the time, while mainly B2B sellers do this 38% of the time.
We also learn that the size of the company matters. As a general rule, the smaller the company the shorter the terms.
SMEs were asked payment terms they typically use for customers. Looking at the shortest terms offered (i.e. fewer than 30 days), micro-sized sellers use these short terms over half the time while small and medium-sized companies are much more willing to extend longer terms. The percent of companies limiting payment terms to fewer than 30 days after delivery:
- 21% – Medium-sized sellers (50-249 employees)
- 26% – Small-sized sellers (10-49 employees)
- 50% – Micro-sized sellers (2-9 employees)
Some questions worth thinking about emerge from these numbers, including:
- Are my terms competitive enough?
- How can sellers get paid upfront while giving their buyers more time to pay?
Read the full report to discover more insights about European SMEs.
What affects the use of payment terms?
The survey offers valuable insights into the usage of payment terms in B2B and how businesses might judge to whom they offer payment terms. But as a manager of a B2B payment terms product talking regularly to businesses, I’d like to look at the challenge differently. The need to offer payment terms is heavily influenced by competition and industry norms.
During the Covid-19 pandemic, where demand drastically outweighed supplies in many industries, payment terms were no longer offered. Buyers with cash paid up front to secure goods. As we return to a new ‘normal’, competitive pressure to offer payment terms is growing and companies need to reflect this in their approach to get the sales they count on.
This combined with the shift to digital transactions, which also got a great leap forward due to Covid-19, means businesses need convenient and efficient ways to offer payment terms in multichannel environments.
How do businesses determine the length of payment terms?
The survey indicates businesses judge the length of payment terms via criteria like ‘familiarity with the customer’ and loyalty / fairness / honesty and integrity of the customer.
However, these are fairly subjective criteria, and don’t lead to a scalable risk model or systematic approach; and, can only be applicable in micro enterprises. Larger businesses need a model from which they can quickly and confidently judge the risk of a buyer.
How can merchants succeed with B2B payment terms?
Terms.Tech, our product, does exactly this for our customers, i.e. provide a scalable risk model that allows them to offer appropriate payment terms to their customers. It alleviates a lot of the hassle and burden of judging buyer risk.
Do you want to sell in comfort while giving your customers flexible B2B payment opportunities? Find out more about how Terms.Tech can de-risk your operation.