Who Sets the Payment Terms?

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Following on from last weeks blog about late payments and what you can do about them,
this week I am talking about payment terms.

The really short answer is you do! It’s your business and up to you what terms you set. Of course, this doesn’t stop your customers asking for you to review the terms that you offer them and you are allowed to decline to change them for them too (in some cases you may
change them).

So what are your options?

Payment is required in full, upfront – if you are in retail then this is what you are essentially doing! But other businesses can do this too, this does of course remove all  possibility that you won’t get paid (barring fraudulent payment of course).

Pro-forma terms basically means that the terms you offer are payment up front but with the expectation that this will be reviewed and they will be moved to actual payment terms further down the line.
You may want to offer pro-forma terms when dealing with a new business and have no credit history so you want them to pay when they order.

Have a review process in place ie after 3 month when you can see the level of orders being made, were payments made on time for the pro-forma invoices.

When you offer terms these can be 7, 14, 30 days (or even 60, 90, 120 days … but I wouldn’t recommend longer than 30 days to be honest, you want the money to be in your bank account rather than their bank account after all). The days you offer might vary from customer to customer depending on how long you have been dealing with them, the level of business that they have with you. Again, keep them under review to ensure that they are being followed and you can amend them if you need to.

If you offer a service and the project is particular long then you might want to look at stage payments i.e.:

  • Deposit upfront

  • Payments at identifiable stages of the project

  • Final payment

If the project is likely to be one that could “drift” then have the final payment pinned to a date and ensure that this is a relatively low percentage too.

Some service based businesses will offer a direct debit service whereby the annual fee is spread across a set period so as to ease cashflow (for both you and them). If you are a service based business then this could be an option for you, just ensure that your customers realise that they still have to pay in full and that they can’t just cancel the DD!

Make sure your terms are clearly set and customers know what they are. Make sure that they are on every invoice so that there is no debate or discussion and if you change them then tell everyone too.

Unless you don’t have terms on offer then it is recommended that you undertake credit checks on your customers and that you review these on a regular basis – just because a company has a good credit rating, doesn’t mean that they will continue to do so.

Terms are set for a reason – stick to them and enforce them ... otherwise they are as much use as a chocolate fireguard!