Do you find yourself constantly waiting for payments from your customers? Are you tired of chasing people for money that is owed to you?
If so, it might be time to consider using the right payment terms.
Payment terms are a set of guidelines that dictate how and when a payment is to be made. They can be used by businesses to get paid faster, and protect themselves from late payments or non-payments.
In this blog post, we will discuss the different types of payment terms and how they can benefit your business!
What are invoice payment terms?
Your invoice payment terms are the conditions that you set for how and when your customer should pay you.
For example, you might state that payment is due within 30 days of the invoice date. Or, you might give a discount for early payment.
Your payment terms should be clearly stated on your invoices, so that your customers know what to expect.
What are some common payment terms?
There are a few different types of payment terms that you can use, depending on your business needs.
Some common payment terms are:
- Net 30: this means that the customer has 30 days to pay the invoice in full. This is a common payment term for businesses.
- Due on receipt: this means that the customer is expected to pay the invoice as soon as they receive it.
- PIA (payment in advance): this means that the customer needs to pay for the goods or services before they are delivered.
- COD (cash on delivery): this means that the customer pays for the goods or services when they are delivered.
Depending on your business, you might choose to use one of these payment terms or create your own custom payment terms.
If you're not sure how to proceed with creating your own payment terms, you can use our free credit control and debt collection policy template.
How do you enforce your payment terms?
Having strict payment terms in place is all well and good, but what if your customers just ignore them?
Well, there are two approaches to making sure your customer respects your payment terms that fall into the traditional carrot and stick paradigm.
You can offer slight discounts to customers who pay early, or you can charge interest on late payments.
Payment discounts
If you want to offer a discount for early payments, two common options are offering a “net 15” discount, which gives the customer a 15% discount if they pay within 15 days, or a “net 30” discount, which does the same but with a 30-day window.
Both of these have their pros and cons – net 15 discounts encourage faster payments but may alienate customers who need more time, while net 30 discounts give customers more time but may mean you have to wait longer for your money.
It’s also worth considering offering a discount for payments made by direct debit, as this is often the cheapest and most efficient way for businesses to receive payments.
If you do decide to offer a discount, make sure you clearly state the terms in your invoice so there’s no confusion later on.
Late payment interest
In the UK, the late payment of commercial debt is governed by the Late Payment of Commercial Debts (Interest) Act 1998.
This allows businesses to charge interest on late payments, as well as claim back any reasonable debt recovery costs.
The rate of interest you can charge is set by the government and is currently at a statutory maximum of eight per cent above the Bank of England base rate.
You can also claim fixed ‘compensation’ payments of £40-£100 per invoice, depending on the size of your business.
For more information on claiming late payment interest and compensation, see our guide to the Late Payment of Commercial Debts (Interest) Act 1998.
It’s important to remember that the threat of interest charges is only effective if it’s legally enforceable in your country, so check the law before adding this to your payment terms.
Finally, remember that late payment interest and charges can only be applied if they’re included in your contract – so if you haven’t already, now is the time to get those terms sorted.
How do the correct late payment terms get you paid faster?
By including the right payment terms in your contracts, you can cut down on the time it takes to get paid by:
- Making it clear when payment is due
- Giving customers all the payment details they need to make prompt payment
- Specifying what happens if payment is late
- Charging interest on late payments
- Charging administrative fees for late-payments
The ability to level a charge when customers don't pay gives you the ability to enforce your payment terms. This acts as a strong incentive for them to pay you quickly, as they will want to avoid accruing additional charges.
It also means that if a client does end up paying late, you are entitled to claim back the money that you’re owed plus any interest or charges that have accrued.
Including the right payment terms in your contract can help ensure that you get paid on time and avoid any disputes further down the line.
Best practice for payment terms
When it comes to best practice for your payment terms, there are a number of things you can do to make sure you’re getting paid as quickly as possible, including:
Discuss your payment terms up front
Before you start work on a project, it’s important to have a conversation with your client about when they will be able to pay and what kind of terms they are looking for.
This will help you to avoid any misunderstandings further down the line and ensure that both you and your client are happy with the arrangements.
Open and clear communication from the outset will also help to build a good working relationship with your client.
Consider offering discounts for early payment
One way to encourage your clients to pay promptly is by offering them a discount for doing so.
For example, you could offer a discount of five per cent if they pay within seven days, or ten per cent if they pay within three days.
This can be an effective way to incentivise prompt payment, without affecting your overall profits too much.
Be flexible with your payment terms
While it’s important to have clear payment terms in place, it’s also important to be flexible and adaptable when it comes to actually getting paid.
If a client is struggling to meet your payment terms for whatever reason, see if you can work out a more suitable arrangement.
This could involve extending the time they have to pay, or offering them a payment plan.
Being flexible with your payment terms shows that you’re willing to work with your clients, and this could encourage them to do business with you again in the future.
Use technology to your advantage
There are now lots of different software options available that can help you get paid faster.
For example, there are invoicing software programs that can automate the process of sending invoices and chasing payments.
There are also payment platforms that allow customers to pay online quickly and easily.
Using technology like this can make it easier and faster for you to get paid.
Chaser's automated credit control platform is the perfect way to get paid on time, every time. By combining the benefits of automation with the human touch required to get the best results, we help you collect payments quickly and efficiently.
Be clear about what you expect
Once you have agreed on payment terms, make sure that these are clearly stated in your contract.
This way there can be no confusion about when payment is due and what happens if it is not received on time.
Clarity in your payment terms can help to avoid any disputes further down the line.
If your invoice is disputed, it can be much harder to get paid, but having clear payment terms that have already been agreed upon by both parties can help to prevent this.
Use the right payment terms for your business
The type of business you have will dictate what kind of payment terms you can realistically offer.
For example, if you are a B-to-B company selling big-ticket items, it is common to offer longer payment terms than if you are a B-to-C company selling lower priced items.
It is important to consider what is realistic for your business and what will work best for you in terms of getting paid quickly.
Include payment terms in your invoices
As well as setting out your payment terms in your contract, it is also a good idea to include them on your invoices.
This will serve as a reminder to your customer about when payment is due and what the consequences are if they do not stick to the agreed terms.
Having all the required details appended to your invoices also helps to make the invoicing process quicker and easier, as everything is in one place.
Enforce your terms
If a client does not adhere to your agreed upon payment terms, it’s important that you enforce them.
This may mean sending reminder emails or making phone calls to chase up payment. It can also mean stopping work on a project until the outstanding payment is made.
Remember, you are within your rights to do this and it is important that you stand up for yourself and your business.
If you are based in the UK, you can charge interest on late payments under the Late Payment of Commercial Debts (Interest) Act 1998.
You can also charge a ‘reasonable’ sum for the recovery of debt, as set out in The Late Payment of Commercial Debts Regulations 2002.
These sums should be included in your contract and invoices so that your clients are aware of them from the outset.
If you have tried all of the above and a client still refuses to pay, you can refer the matter to a professional debt collection team.
Taking action to recover late payments can be daunting, but it is important to remember that you are entitled to do this, and it is important to stand up for yourself and your business.
Always be polite and professional in your tone
When creating your payment terms, always ensure that the language reflects the relationship that you want to have with your clients.
You should avoid using legal jargon, and instead opt for clear and concise language that will be easy for your client to understand.
You should also endeavour to always be polite and professional, even in sections covering the fallout of not making payment.
The aim here is not to be threatening, but rather to dispassionately display the consequences of not adhering to the agreed terms. This tone of polite professionalism should carry over into your chasing efforts as well.
When following up on overdue payments, don't be afraid to be assertive and remind your client of the agreed terms.
However, always remember to be respectful, as you want to maintain a good relationship with your client. After all, they are the ones paying you for your goods or services.
Take action now
If you want to get paid faster, then there are lots of things you can do to make it happen. By following the tips in this blog post, and implementing the correct payment terms, you can start to see results straight away.
Chaser's automated credit control platform is the perfect way for your business to get paid on time, every time. With our software, you can easily send invoices and chase payments so that you never have to worry about getting paid late again.
Try Chaser today and see how easy it is to get paid on time!
