Ask HN: Why Net 30? Why not pay immediately?

https://news.ycombinator.com/item?id=4089566

by bazookaBen • 14 years ago

7 13 14 years ago

news.ycombinator.com

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?

paulhauggis• 14 years ago

Are you filtering your content before giving them cash? What if it's complete garbage/copied.

bazookaBen2• 14 years ago

verification comes before payout

dalke2• 14 years ago

EDIT: Oops! I read your post the other way. You want to pay immediately, rather than net-15 or longer, rather than get paid immediately. Still, most of the below applies.

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.

bazookaBen2• 14 years ago

i'm wondering if for the content submitters, it gives them added motivation to get paid as soon as their content gets verified.

dalke2• 14 years ago

Probably. But then there's the onus on you to do so. What if the payment software breaks while you're on holiday for a few days?

Geee• 14 years ago

If your customers pay you X amount in advance and you hold that money for 30 days, you are X amount richer all the time. Imagine running a business with $10 billion in revenue but without profit and that starts to make sense. Typically, companies try to pay their bills as late as possible. I think there's also some 'professional' term for this type of cash handling, which I don't know. So, you can pay them immediately, but you'll have to operate with less money in your bank account.

murtza• 14 years ago

I think accounts payable is the term you were looking for.

Here's a link to Wikipedia for the term: http://en.wikipedia.org/wiki/Accounts_payable

bks• 14 years ago

I dont't think that there is anything illegal about paying for services rendered at the time of delivery. Nor is there anything wrong with pre or post paying.

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.

trailcable• 14 years ago

Administrative overhead and float are 2 off the top of my head.

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.

nmcfarl• 14 years ago

In my business float is the big one - we pay our contractors at completion of work, which means if our clients pay us when they receive the goods, we’ve got to come up with the money to pay the workers before we’d gotten paid. This can get quite painful quickly, and meant in the early days we’d have to turn down large orders because we didn’t have enough float to pay the workers.

mcnees287• 14 years ago

Some firms may have lumpy cashflows and are unable to put up all of the cash at one time for a purchase or they simply just may not wish to part with current cash holdings.

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.

gexla• 14 years ago

This is essentially what Amazon Mechanical Turk does. You do an action and the payment for that action is available as soon as it's approved (usually anywhere from less than an hour to a day.) However, I believe you can only pull out your earnings after reaching a $10 minimum.

bmelton• 14 years ago

There are a lot of good answers in here, but to compile them and maybe add some:

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.

Ask HN: Why Net 30? Why not pay immediately?

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