What are Net Terms?
Before your food business can start making money, you need to produce your product for distributors to buy and retailers to sell. Buying inventory and ingredients costs money and paying these upfront costs can be tough when you are just starting a business. Negotiating net terms with your suppliers and distributors can help balance your cash flow.
Net terms are payment agreements between buyers and sellers. When buying ingredients to produce your product, your food business is the buyer and suppliers are the sellers. When selling your products, your food business is the seller and distributors are the buyers. Your food business can enter into Net Terms Agreements between your suppliers, distributors, or both.
Common Net Terms Agreements:
Net-30, Net-60, or Net-90:
Net-30 is the most common Net Term. With Net-30, the buyer has 30 days to pay back the seller starting from the time the invoice is processed (usually the same day as date-of-delivery). Same logic applies for Net-60 and Net-90.
These Terms are less common for small and midsize businesses because cash inflow can be unpredictable, and sellers do not like to prolong the payment period. Big brands often enter into Net-60 or Net-90 Terms with suppliers because suppliers know that these big brands have enough cash inflow to pay them back. In fact, big brands often dictate their payment dates to suppliers.
2% Net 10:
In this agreement, buyers receive a 2% deduction fee if they pay the seller within 10 days of the seller’s invoice.
Large distributors like UNFI use this agreement frequently because they have the cash inflow to pay early and receive the deduction fee.
If your food business needs cash now, 2% Net 10 is a good option because distributors will pay for your product faster but at a smaller gross margin due to the 2% deduction fee.
Negotiating Net Terms
Don’t be afraid to ask your supplier or distributor to arrange a Net Terms agreement. Suppliers can benefit from Net Terms because businesses that have longer payment terms have more time and money to focus on sales. More sales translate into higher demand for ingredients, which ultimately means higher demand for your supplier’s inventory. Distributors that pay for your products early will receive a reduced fee on their invoice in 2% Net 10.
Do not miss your Net Terms’ pay date because that can jeopardize your relationship with your supplier or distributor and ultimately devalues your business. The more communicative you are with your suppliers and distributors,, the more trust you build and the more likely they will consider Net Terms.
Getting familiar with Net Terms can help you balance your business’s cash flow. The real cash inflow for your business comes from receiving payments from customers who buy your products from stores. Suppliers understand that businesses need their ingredients to make products that make money. Distributors realize that without them, your products won’t get on the shelves in retail stores. Net terms can be a mutually beneficial relationship between your and your supplier or distributor.
If your supplier or distributor does not offer Net Terms, ask them about paying with a credit card. Credit card payments allow you to defer payment until your credit card bill is due. This buys you some time to get paid by your distributors before the bill is due and can ultimately help maintain a positive cash flow.