ELi5: why do companies have Net 30/60/90 terms?


If when I purchase something I pay for it immediately why do companies/government/orgs after approving a transaction and/or receiving the work take 1-2months to pay for it?

EDIT: I am a new agency owner, so trying to figure out cash flow

EDIT 2: thank you guys so much for the detailed answers! Really helped me further narrow down the kinds of customers I do and don’t want to work with moving forward.

In: 2

From a construction pov, we are purchasing materials for the client. Net 60 allows us to bill the client so we can pay for the materials with funds from them. That way, we aren’t financing so much of their project.

Think of it like a store credit card, where you can make a purchase and pay later, but for business.

A number of factors will one into play, but I will only provide one example.

Most of these companies may not get paid for selling the goods until the goods are installed, sold, or consumed. They setup agreements with suppliers to have some time to get their payments from customers and it is typically a mutually beneficial relationship.

A couple reasons.

First, is typically those dollar amounts are significant: it’s not paying 100 dollars to the store or even 1,000 dollars to a painter.

It’s paying hundreds of thousands or millions of dollars. Companies/Governments/etc don’t just keep that money sitting around for the whole project ready for it to be done. They would rather be able to use that money for other things, and then once the project is finally actually done, since projects often get delayed, have a month or two to then bring the money together to pay for it.

Another thing is it gives them a chance to check your work and dispute you. If you did a job and they paid you right away, and then two months later they finally get around to looking at it and find something wrong, it’d be tough for them to get their money back. By legally withholding payment by the term of the contract, it gives them time to look over and check you. And then if they find something they typically then get to invoke another part of the contract about getting whatever the problem is fixed.

Essentially, taking that two months does nothing but help the company/government, and the workers/contractors will accept those terms when it comes to jobs that are hundreds of thousands to millions of dollars.

Anyone in business is eventually passing on those costs to their customer. It is better if they can delay payment until after they have been paid.

As several folks have said, if I buy paint for a job, I don’t get paid for the job until I finish it. I’ll buy paint from the store that works with me to take their $$ after I get $$ from my customer.

This is true of lawyers, and clerical workers too. They buy coffee, envelopes, printer paper, staples, etc – ultimately their customer pays for all of that.

It isn’t essential to offer 30/60/90 days – but it can make a huge difference for a small business, or one with cash flow issues, or one that is capital intensive.

I’ll pay slightly more for paint on 90 day terms, so that store has an edge over anyone else in attracting painters like me.

(I’m not actually a painter – just using that example).