Payment terms are the contractual arrangement between you and your accounts about when invoices get paid. They're also one of the primary competitive factors in wholesale distribution — accounts with purchasing scale use their leverage to push for longer terms, and distributors who want those accounts have to decide how much financing they're willing to provide. Getting this right is a balance between the competitive pressure to offer terms and the operational reality that extended terms cost you real money.
What Each Term Actually Means
Net 30: The invoice is due in full 30 days from the invoice date. This is the standard in most wholesale distribution verticals. An invoice dated March 1st is due March 31st. If it's not paid by then, it's past due.
Net 60: Due in 60 days. Common in industries where buyers have longer payment cycles — large institutional accounts, government entities, and some retail accounts. Offering Net 60 on a $10,000 monthly account means you're carrying an average of $20,000 in accounts receivable from that account at any given time (this month's invoice plus last month's). Factor that into the relationship economics.
Net 90: Due in 90 days. Primarily used by large national chains and retail buyers who have significant purchasing leverage. For most SMB distributors, Net 90 means you're financing three months of an account's purchases at any given time. At $15,000/month, that's $45,000 in outstanding receivables from one account — a significant cash flow commitment.
2/10 Net 30: A discount term — the buyer can take a 2% discount if they pay within 10 days, otherwise the full amount is due in 30 days. The annualized cost of this discount to you is approximately 36% — but capturing early payment significantly improves your cash flow and reduces collection risk. Many distributors find this trade-off worthwhile.
COD (Cash on Delivery): Payment due at the time of delivery. Appropriate for new accounts with no established credit history, accounts that have previously gone past due, or accounts you have some concern about. COD eliminates AR risk but can create operational friction (driver collecting payment at delivery).
Prepay: Payment due before the order ships. The safest option for new accounts or high-risk accounts. Can be done via ACH, check, or credit card before the order is processed.
When to Offer Each Term
The decision framework:
- New accounts, no credit history: Prepay or COD for the first 1-3 orders, then evaluate for Net 30 after a payment track record is established
- Established accounts, good payment history: Net 30 is standard. Offer Net 60 only when the account has negotiating leverage and the volume justifies the financing cost
- Large chains and institutional buyers: They will likely request Net 60 or Net 90. Evaluate based on the account's credit quality and whether the volume justifies your extended AR exposure
- Accounts with poor payment history: Downgrade to COD or prepay. Do not extend additional credit to chronically late payers
How to Qualify Accounts for Terms
A credit application is the starting point. Collect: business name and legal structure, years in business, owner information, 3 trade references (suppliers they currently buy from on terms), bank reference (bank name, account type — not the account number), and authorization for a credit check.
Run a business credit check (D&B, Experian Business, or Equifax Business). A PAYDEX score of 80+ means the business pays within terms. 70-79 is acceptable with a lower credit limit. Below 70 warrants either prepay terms or a very conservative credit limit.
Call at least 2 of the 3 trade references. Ask specifically: "Do they pay within terms? Have they ever been past due? Would you extend credit to them again?" A trade reference that pauses before answering "yes" is telling you something.
Enforcing Payment and Late Fees
Your T&C should specify late payment fees — typically 1.5% per month on overdue balances (18% annualized). This needs to be disclosed upfront in your terms and agreed to by the account. When invoices go past due:
- Day 31 (Net 30): Automated payment reminder — friendly, factual
- Day 38: Second reminder — note that a service charge will be applied if payment is not received
- Day 45: Personal call from accounting — not from the sales rep
- Day 60: Credit hold — no new orders processed until the balance is paid
- Day 90: Escalation — formal demand letter, consider engaging a collections firm or attorney
Factoring as a Cash Flow Tool
Invoice factoring allows you to sell your receivables to a third party (a factor) at a discount (typically 2-5% of invoice value) in exchange for immediate cash — often within 24-48 hours of invoicing. This eliminates AR risk and converts Net 30/60 receivables into same-day cash.
Factoring makes sense when: your growth is constrained by cash flow tied up in AR, you offer Net 60+ terms to large accounts, or you lack the banking relationships to get a traditional line of credit sufficient to cover your AR gap. The cost (2-5% of revenue factored) is significant, but for a growing distributor whose alternative is turning down large accounts due to cash constraints, it can be a viable tool.
Credit Hold Procedures
A credit hold should be automatic when an account's AR aging exceeds a defined threshold — typically when any invoice is 30+ days past due, or when the total outstanding balance exceeds their credit limit. The account should be notified immediately: no new orders will be processed until the overdue balance is resolved.
The communication matters: "We've placed your account on hold due to an outstanding balance of $X. We'd like to get this resolved quickly so we can continue serving you. Please contact [accounting contact] to arrange payment." Firm, professional, and offering a path forward.