Ask HN: Why Net 30? Why not pay immediately?
Why do companies do Net 30, 15, etc?
i'm planning to start a service which pays users money for submitting content.
is it legally possible to do a payout immediately upon a successful submission?
i'm planning to start a service which pays users money for submitting content.
is it legally possible to do a payout immediately upon a successful submission?
Sure, it's legally possible. Do you want them to have a stack of cash for you when you're done? Then make that be a requirement in the contract. I'm not sure how you would enforce it - charging a penalty for late payment makes the most sense.
But most companies don't have that much cash on hand without preparation, and keeping a lot of money around for all of the vendor payments sounds very risky. Most people would feel safer paying by check or wire transfer. Of course, that might take a few days if you get paid on a bank holiday
What if the person you've been working with is sick that day - who can confirm that the payment is authorized for that day? What if your invoice arrives at the end of the day just before everyone takes a week off for Christmas? Or on the day of the company picnic, or there was a blackout.
Basically I'm saying that expecting to be paid on the same day is organizationally difficult for the general case, and therefore unreasonable. Net-15 is reasonable, although if there's only one person handling accounts then it becomes a bit trickier taking two weeks off for holiday. Net-30 has been standard in my experience and it's what I charge. I've had one client do net-60. That was a right nuisance.
As mentioned below a reason to have a gap between deliver and payment is typically
1) to manage cashflow 2) to inspect good and services 3) the buyer is the middle man or the service is part of a larger project that needs to be fulfilled before the person gets paid. (This can be part of 1.) 4) To use the cash, leverage on something else and wait to pay vendors - this period is called the float. It is essentially an interest free loan that the vendor makes to the supplier.
You could use an escrow service for payments by essentially moving the money from an active cash account to a holding account or 3rd party holding account that releases to the vendor.
But in the long run, hold onto cash until you have inspected and approved and then pay immediately.
My typical terms are 10 days and I get paid in 17.
Often if a firm is willing (able) to pay upfront in cash they will receive a discount such as being required to pay only 0.8x, for example. The key point is that the true cost of the goods is in fact 0.8x. while x is the financed cost.
Net 30,15 and so on is a form of financing the purchase to the purchasing company. The rate that one must pay to get the goods today and pay in thirty or fifteen days should be compared to other forms of financing. A firm should consult a bank for instance to determine if they can finance the purchase at a lower rate.
Here's a link to Wikipedia for the term: http://en.wikipedia.org/wiki/Accounts_payable
Automation makes the first one easier, but unless it's all automated it may still be a headache. Having to send out disbursements once a month is a lot less overhead.
1) The time between payments gives you the ability to verify that the service has been done correctly and isn't in any way fraudulent. Adwords is a great example, they hang on to the cash for as long as they can because once they pay you, they can't take the money back.
2) Immediate payment, even if automated, doesn't give any opportunity to double-check things. If you're dealing with $10 items, maybe that isn't a huge deal. But what if your task queue goes crazy and redistributes tasks over and over, and now you've just paid somebody $10 every minute the heartbeat pulsed and now you've paid them $20,000.
3) Processing deductions. The more you can charge on a single transaction, the better of it is. If you're making many small transactions and are losing 30 cents + 2.9% on each one, that's 33% you're losing on a one dollar process. Obviously, higher amounts negate this, and Net-30 terms help to negate that even more.
4) I assume you're talking digital processing, otherwise, I do not want to be the guy that has to cash 30 checks when I could have only had to cash 1.
5) The most important, possibly, is interest. The longer you can keep the funds in your account, the more interest it draws. I once worked for a restaurant that paid well, but had pretty thin margins due to competition. They always paid on time, but very politely asked that you waited until noon the next day to cash your paycheck, as interest calculations 'ticked' every day at noon at the bank they used, and while it doesn't sound like a ton, the interest on the paychecks of a 30-person staff adds up pretty quick, and every penny counts.
6) Lastly, if you have to track these payments for tax purposes, the less payments you make the better. Rolling in everyone's accruals into one 'lump sum' for payment could easily be the difference between filing monthly taxes in a couple of hours vs. having to take days to file.