Choosing payment terms for your business

Getting paid correctly and on time by customers can be a constant frustration for business owners. Communicating your terms is the best way of making sure you aren’t out of pocket – or are left chasing debtors.

Setting your terms of payment

Your terms of payment let customers know when and how you expect to be paid. Setting your terms and letting your customers know your expectations gives you better control over your business and a useful platform for resolving potential payment issues.

Setting terms of payment shouldn’t discourage regular or new customers from doing business with you – it can pay to give customers a number of options.

Remove any barriers to a sale

Encourage customers to buy from you by removing barriers to the sale. Make the purchase as easy as possible through a variety of ways to pay, including:

  • Mobile payment options.
  • Cash or check.
  • Bank deposit.
  • Online money transfers to your bank account.
  • Debit or credit card payment.

Take the time to become familiar with all these options and their relative pros and cons.

You might, for example, decide to accept only major credit cards, or offer a discount for cash, or give your staff leeway to negotiate cash discounts if customers request this.

Know your industry’s norms

It’s worth researching the generally accepted payment terms in your industry and terms competitors use. This doesn’t mean you have to follow suit. You may be able to spot a gap or opportunity to be more flexible. The following examples could build a competitive edge:

  • Feature more payment options than most competitors.
  • Provide quicker and easier ways to pay.
  • Offer a discount for cash deals that give you immediate cash flow and protect you from credit payment defaults.
  • Advertise a discount for online purchasing – as this has lower costs for your business than conventional transactions.
  • Offer longer payment terms in return for a slightly higher price.
  • Investigate faster and more convenient ways to pay using the latest smartphone technology.

Offer variations for payment

There are numerous terms you can set out for your customers to pay. Sometimes it’s best to use a method that works for you both.

Payment in advance

Some businesses, such as ones operating over eBay or other auction sites, require payment in advance to provide protection against possible online fraud.

Customers first pay the purchase price (including shipping costs) into your bank account. You then wait for the payment to clear before sending the goods or supplying your services.

Be wary of relying on a fax of a bank deposit, or email confirmation not sent directly from the depositing bank as proof of payment.

Progress payments

These can be useful if you’re working on a lengthy project, such as a building or a software development program.

Progress payments serve two important purposes:

  • They provide a regular cash flow to pay running costs.
  • They protect you against total loss if your client goes bust.

Normal practice is to build progress payments into contracts, based on measurable milestones.

Early payment discounts

Early payment discounts can encourage people to pay on time. They’re more useful on higher margin products or services as the discount will have less impact on your profits than thin-margin products.

For example, if you offer customers 60 days credit, consider a 5% discount for payment within 30 days.

Some customers will try to claim discounts after the due date. It’s in your interests to politely but firmly point out your terms of trade. If you don’t stick to them, your customers won’t either.

Contracts and debit orders

Businesses that offer regular services such as a gym or an accounting firm can benefit from offering customers a set annual (or longer) contract. The attraction for the customer is a price that’s typically lower than paying for each visit or service.

Spreading the cost over 12 monthly payments can also make it easier for them to manage their budgets. Meanwhile, your business benefits from a regular cash flow. Requiring the customer to set up a debit order also eliminates time spent chasing payments.

Selling on credit

Selling on credit terms can expose your business to delayed payments or outright loss, which can play havoc with your cash flow. Some rules to help you include:

  • Developing or adapting a credit application form – your bank manager can help.
  • Asking customers for business references and permission to do a credit check.
  • Setting agreed credit limits.
  • Clarifying your payment terms – terms of 30 days or 60 days are the most common.
  • Explaining any interest charges you’ll impose on late payments.
  • Getting your customer to sign acceptance of these conditions to prevent future arguments.
  • Monitoring any overdue payments or orders that will breach agreed credit limits.

Choosing your payment terms

By now you’ll have a sure idea of payment terms that could suit your business. Run your choices past your accountant, bank manager and lawyer for their input.

Bear in mind that your terms should attract customers, not turn them away. If you don’t accept credit cards or you add a surcharge for credit card payments, for example, you might lose sales. In this case, weigh up the extra costs of accepting credit card payments against the business you might otherwise lose. It’s your decision.

Communicate your terms to customers

Whatever your payment terms, communicate these clearly in your terms of trade and in your business signage. For example, don’t frustrate shoppers who arrive at the cashier with their selections only to discover you don’t accept credit cards.

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