Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How Net 60 Terms Trap Small Business Cash Flow
Transcript
- Lucas: If these conversations have moved your work forward in some small way, I want to mention something important. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. Luna: It keeps the lights on and the research sharp, so if you can spare a few dollars, it helps us keep digging into these messy financial realities. Lucas: Right. And speaking of messy realities, let’s talk about the quiet killer of small business profitability: the Net 60 payment term. Most founders hear Net 60 and think, 'Great, the client trusts me enough to pay in two months.' But in today’s environment, that two-month gap is essentially an unsecured loan you’re giving away at zero interest. Luna: Exactly. And the bigger the client, the more they lean on that leverage. I’ve seen service firms lose three percent of their gross margin just covering payroll during those extra thirty days. Lucas: Three percent sounds small until you realize it’s compounding against your own cost of capital. Let’s look at a specific case. There’s a mid-sized industrial component manufacturer in Ohio, let’s call them Apex Manufacturing. They landed a contract with a regional logistics giant. The deal was great volume, but the terms were Net 90. That means ninety days from invoice date, not delivery date. Luna: Ninety days is brutal. Most manufacturers operate on tight cycles. How did Apex handle that initial shock? Lucas: They swallowed it initially because the revenue boost looked good on paper. But within six months, their cash conversion cycle stretched to over a hundred days. They had to draw on a line of credit just to meet bi-weekly payroll. The interest on that credit wiped out the profit margin the new contract was supposed to generate. Luna: So they were effectively subsidizing the logistics company’s working capital with their own debt. That’s a classic wealth transfer from supplier to buyer. Lucas: Precisely. And here’s the thing most owners miss: the logistics company isn’t even paying high interest on their own cash. They’re sitting on reserves or using cheap corporate credit lines. Apex is paying prime rate plus points to bridge the gap. It’s an arbitrage that works against the smaller player every single time. Luna: It feels like a trap because you’re afraid to push back. You think, 'If I ask for Net 30, will they walk?' So you take the Net 90 and bleed slowly. Lucas: That fear is exactly why procurement teams push these terms. They know small businesses are desperate for validation and volume. But there’s a middle ground. Apex eventually realized they couldn’t sustain Net 90. They started negotiating a hybrid model. Fifty percent due on delivery, fifty percent in forty-five days. It wasn’t perfect, but it cut their cash tie-up in half. Luna: Hybrid terms are smart. It shows commitment but also protects liquidity. Did the client agree to that compromise? Lucas: They did, but only after Apex demonstrated that their supply chain reliability depended on timely material purchases. Lucas, sorry, I mean the owner demonstrated that if they couldn’t pay their raw material suppliers on time, the whole pipeline stalls. It shifted the narrative from 'you’re difficult' to 'we’re ensuring quality control.' Luna: That’s a powerful reframing. You’re not asking for money; you’re protecting the service level agreement. Lucas: Exactly. And let’s quantify the damage of sticking with pure Net 60 or Net 90. If you’re doing five million in annual revenue with a ten percent margin, that’s five hundred thousand dollars in profit. But if your cash is tied up for an average of forty-five extra days compared to Net 30, you’re looking at roughly fifteen thousand dollars in opportunity cost per year just in lost investment capacity. Multiply that by three years, and it’s nearly fifty thousand dollars left on the table. Luna: Fifty thousand dollars is a lot of marketing budget or equipment upgrades. It’s not just accounting noise; it’s strategic paralysis. Lucas: It is. And it gets worse when you factor in inflation. The dollar you receive in ninety days buys less than the dollar you earned today. If we’re seeing persistent price pressures in September twenty twenty-six, that erosion is real. Your receivables are depreciating assets in a slow-motion sense. Luna: I hadn’t thought about inflation eating the value of receivables. Usually, people just worry about bad debt. But yes, purchasing power loss is definitely a hidden cost. Lucas: Right. So what are the practical exits? First, pricing adjustments. Some companies build a two percent discount for early payment, say Net 10. It incentivizes the buyer to pay faster and reduces your exposure. Second, invoice factoring. It’s not always the cheapest option, but it converts receivables into immediate cash. Luna: Factoring can be expensive though. Fees can run anywhere from one to five percent depending on the volume and risk. Is it worth it for everyone? Lucas: Not for everyone. But compare the factoring fee to the cost of a bank line of credit or the opportunity cost of stalled growth. For Apex, factoring about twenty percent of their largest invoices allowed them to pay their raw materials upfront, securing better prices from suppliers. It created a virtuous cycle instead of a vicious one. Luna: So it’s about leverage. Using cash flow tools to gain better terms upstream, which improves your downstream position. It’s a systemic fix rather than a band-aid. Lucas: Spot on. Another angle is supply chain finance programs. Some large corporations offer platforms where their approved suppliers can get paid early by a third-party financier at the corporation’s credit rate. Since the corporation has better credit, the discount rate is lower than what a small business would get on its own. Luna: That’s interesting. It outsources the credit risk to the big player’s balance sheet. But do small businesses always know these programs exist? Lucas: Often they don’t. Procurement teams rarely volunteer this information. You have to ask. 'Do you have a dynamic discounting or supply chain finance program available?' If they say no, that’s your cue to negotiate harder on terms or find alternative financing. Silence is usually a signal that they’re enjoying the free float. Luna: Silence is a signal. I love that. It puts the onus on the seller to probe, which makes sense since we’re the ones holding the bag on cash flow. Lucas: Exactly. And finally, let’s talk about contract structure. Instead of flat Net 60, try milestone billing. For a six-month project, bill twenty percent at kickoff, forty percent at midpoint, forty percent at completion. It smooths out the cash flow curve and prevents that massive cliff-edge payment delay. Luna: Milestone billing is standard in construction and software, but it’s underutilized in traditional manufacturing and services. It changes the psychology from 'waiting for the end' to 'progressive reward.' Lucas: It does. And it aligns payment with value delivery. Buyers are more willing to pay for work done now rather than promising to pay for work done months ago. It reduces their perceived risk too, because they’re paying as they go. Luna: So the lesson is: don’t accept long terms passively. Treat payment terms as a negotiable part of the price, just like unit cost or delivery speed. Lucas: Precisely. Payment terms are part of the total cost of the deal. If you accept Net 90, you’re effectively lowering your price by the cost of financing that gap. Make sure your margin analysis includes that financing cost before you sign. Luna: That’s a crucial mental model shift. From 'what’s my hourly rate?' to 'what’s my fully loaded cash flow adjusted rate?' Lucas: Yes. And if you’re listening to this and currently stuck in Net 60 or Net 90 territory, start mapping out your exit strategy. Whether it’s renegotiating next quarter, trying factoring on one key account, or pushing for milestone payments on new bids. Every day you delay fixing this is another day of hidden tax on your business. Luna: It’s easy to ignore until the payroll bounce hits. Better to fix the plumbing before the pipe bursts. Lucas: Well said. Next week, we’ll dive into how inventory financing can actually working capital if structured correctly, rather than just tying it up. Stay tuned.