A manufacturer wins a major contract.

The customer wants Net 90.

Sales sees an opportunity. Operations sees a full production schedule. The CFO sees something else:

The company just agreed to finance the customer for three months. Now imagine the customer does not actually pay on Day 90.

They pay on Day 105.

The manufacturer has already purchased materials, funded labor, produced the goods, shipped the order, and carried the receivable.

The sale generated revenue.

But the cash has not arrived.

That is the hidden cost of long payment terms.

Are Long Payment Terms Really a Form of Customer Financing?

Yes.

When a manufacturer delivers products today and receives payment months later, the supplier is effectively financing the gap between delivery and collection. The longer that gap becomes, the more working capital remains tied up in accounts receivable. McKinsey has noted that companies can be surprised by how much cash is tied up in receivables and that improving working capital can unlock significant cash without necessarily increasing revenue. (McKinsey & Company)

The important distinction is this:

Payment terms may be part of the commercial strategy, but the cost of those terms belongs in the financial analysis.

If Net 90 helps win a highly profitable, strategically important contract, the tradeoff may be worthwhile. If Net 90 becomes Net 105 or Net 120 as a matter of routine, the economics can change quickly.

What Happens When Net 90 Becomes Net 105?

Consider a component manufacturer supplying an OEM. The supplier agrees to Net 90 because the contract represents significant recurring revenue. But the customer begins paying at approximately Day 105.

That additional 15 days may not sound dramatic. Multiply it across millions of dollars in receivables, however, and the cash impact becomes much harder to ignore. The manufacturer is now carrying:

• Raw material costs
• Labor costs
• Production costs
• Inventory investment
• Transportation costs
• Overhead
• And the customer’s unpaid balance

The customer receives the product. The manufacturer carries the financing burden. And the longer the receivable remains outstanding, the longer that capital cannot be deployed elsewhere.

How Do Long Terms Affect DSO?

Days Sales Outstanding, or DSO, measures how long it takes a company to collect its receivables. Long contractual terms naturally increase the collection cycle. But the bigger issue is payment performance relative to those terms. A customer paying on Day 90 when the agreement is Net 90 is behaving differently from a customer paying on Day 105. That 15-day difference represents additional working capital tied up in the customer.

PwC’s 2025 Working Capital Study highlights the continued importance of collections, credit risk, billing, dispute management, and automation in improving working-capital performance. (PwC) For CFOs, the question should therefore go beyond: “What are our payment terms?”

It should be: “What are our customers’ actual payment terms?”

The contract may say 90. The cash conversion reality may say 105.

Why Are Manufacturing Receivables Especially Complex?

Manufacturing AR rarely exists in isolation. A single invoice can depend on purchase orders, receiving documentation, delivery confirmations, quality inspections, production schedules, pricing agreements, deductions, and contract requirements. Manufacturing collection research highlights long payment terms, large outstanding balances, deductions, and PO-driven invoicing as recurring challenges for industrial accounts receivable.

That complexity creates another problem: A delayed payment can look like a credit problem when it is actually an operational problem.

For example, an OEM may withhold payment because a receiving document is missing. Another customer may dispute a quantity. Another may deduct a charge that was never properly communicated. The longer those issues remain unresolved, the older the receivable becomes.

How Can CFOs Tell If Extended Terms Are Worth the Cost?

The right question is not whether long terms are good or bad. It is whether they create enough commercial value to justify the capital they consume. Finance teams should evaluate at least five factors.

1. Customer profitability

A large customer is not automatically a profitable customer. Evaluate gross margin, servicing costs, deductions, disputes, and financing requirements alongside revenue.

2. Actual payment behavior

Compare contractual terms with actual payment performance.

Net 60 paid on Day 60 is one situation.

Net 60 consistently paid on Day 90 is another.

3. Customer concentration

If one customer represents a substantial share of outstanding AR, extended terms can create both liquidity and concentration risk.

CFO.com has advised finance leaders to pay particular attention to large AR exposures and customer concentration when evaluating credit risk. (CFO.com)

4. Cost of capital

Every dollar tied up in receivables has an opportunity cost.

That capital could otherwise support inventory, production, technology, acquisitions, debt reduction, or other strategic priorities.

5. Strategic value

Some customers justify favorable terms because they provide predictable volume, long-term growth, market access, or other strategic benefits.

The key is knowing what the company is actually receiving in exchange for financing that customer.

Should Manufacturers Stop Offering Long Payment Terms?

Not necessarily. Long terms can be commercially useful. A manufacturer competing for a major OEM contract may need to accommodate procurement expectations. A supplier entering a new market may use favorable terms to establish a relationship. The problem begins when extended terms become permanent financing without a corresponding commercial benefit.

A CFO should periodically ask:

Did the customer earn these terms?

Are they still commercially justified?

Are they actually paying within them?

What is the working-capital cost of maintaining them?

Would pricing, volume commitments, deposits, milestones, or other structures better balance the relationship?

The answer may be different for every customer.

What About Customers Who Consistently Pay Late?

This is where credit policy and accounts receivable need to work together. If a customer repeatedly pays beyond agreed terms, finance teams should determine why. Is the issue:

• A procurement process?
• Invoice disputes?
• PO mismatches?
• Customer cash constraints?
• Internal approval delays?
• Deliberate payment stretching?
• Or simply terms that no longer reflect the commercial relationship?

Each situation requires a different response. But repeatedly accepting late payments without reassessing the account effectively changes the customer’s terms without formally changing the contract.

Net 90 becomes Net 105 because the customer says so. That is a credit decision—even if nobody formally made one.

When Should a Manufacturer Escalate an Aging Account?

The earlier an issue is identified, the more options a supplier generally has. A single administrative delay may require nothing more than resolving the underlying documentation issue. A pattern of missed commitments, increasing balances, repeated disputes, and deteriorating communication deserves closer attention.

Manufacturers should pay particular attention when AR growth begins outpacing sales growth or when a customer’s payment behavior changes materially from its historical pattern.

At that point, the objective is not simply to collect an old invoice. It is to prevent the receivable from becoming an increasingly expensive source of customer financing.

What Is the CFO Takeaway?

Long payment terms are not free. They consume working capital, increase the collection cycle, and can make a supplier more financially exposed to its largest customers. That does not mean every manufacturer should shorten its terms. It means every manufacturer should understand what those terms are actually costing the business.

The better question is not: “Can we afford to give this customer Net 90?”

It is: “What are we earning in return for financing this customer for 90 days—and what happens if 90 becomes 105?”

For manufacturers, OEM suppliers, industrial equipment companies, and component providers, that distinction can turn accounts receivable from a back-office metric into a strategic financial decision. When receivables move beyond normal payment behavior, a structured commercial recovery process can also help manufacturers address outstanding balances without unnecessarily damaging valuable business relationships.

BARR Credit Services supports businesses with commercial accounts receivable recovery, including first-party and third-party collection solutions built around professional, relationship-conscious recovery.