Offering payment plans can reduce late payments and allow small business owners to increase revenue when they get started. However, it will make sense to only provide customer payment plans after first considering their impact on your business and customers.
This blog post looks at how payment instalments work, the benefits of payment plans for businesses, the benefits for customers who use them, and practical advice on how to offer payment plans to customers in your online store.
The late payment problem
Businesses are facing a late payment crisis, costing companies in Australia alone over $19 billion every year. This is an increase from the $10 billion it cost businesses in 2015, costing them more than ever. Poor cash flow is responsible for 90% of failures of small and medium enterprises.
The late payment problem is felt by businesses globally, as 48% of all invoices issued in a given month get paid late, and the World Bank predicts that late payments cost the global economy over $ 40 billion every year. The impact of late payments can be huge, with businesses often forced to rely on third-party debt collection and equity financing to keep the business running, and it can also impact staff retention rates due to issues covering overheads.
Bad debt can reduce a business's ability to grow, invest in new technology, or even hire new staff. It can also cause them to default on their accounts payable, creating financial difficulty. Even if businesses recover, bad debt can damage their reputation and impact their ability to grow their customer base in future.
In an attempt to resolve this issue, many companies waste countless hours manually following up with late payers or writing off unpaid invoices as bad debt - losing millions in the process.
There is, however, another option - offer payment plans.
How to offer payment plans to customers to reduce late payments
Payment flexibility is one of the main benefits of a customer payment plan.
Payment plans allow businesses to tailor instalment payments to their customer's specific needs, making it a more attractive proposition than simply asking for payment in full upfront - or continually chasing customers for an overdue invoice they cannot pay in full.
Payment plans allow businesses to tailor payments to their customers' specific needs, making it a more attractive proposition than simply asking for payment in full upfront - or continually chasing customers for an overdue invoice that they are simply unable to pay in full.
This flexibility is vital for companies that deal with big-ticket customer purchases, as instalment agreements give you better visibility on when that cash is coming in and can smooth out your cash flow for easier planning and forecasting.
When your clients are in a financial rough patch, offering them flexible plans in this time of difficulty can also help build trust and strengthen relationships with clients. By providing consumer financing that meets the customer's needs, businesses show that they are willing to work with their clients rather than against them, which can often lead to better customer retention rates and more repeat business in the future.
Simply put, offering payment flexibility increases your chances of receiving payment in full and on time because the client is more likely to afford it. This can save you time and money in chasing payment for outstanding invoices, which would otherwise have been late or unpaid.
When to offer payment instalment plans
You don't need to jump straight to offering an instalment plan as soon as an invoice becomes overdue. Customer payment plans should only be used as a last resort and provided when all other options have been exhausted. The buy now, pay later (BNPL) approach can be risky when you are a small business, leaving a high chance of reduced cash flow if many customers delay payment by paying for a larger item over time.
The first step in getting any overdue invoice paid upfront is proactively and politely chasing your customer through email reminders. If that doesn't work, customer financing represents another option before writing off the debt or turning to third-party companies for debt collection.
An example schedule for when to offer a payment plan might look like this:
- 0-30 days overdue: polite email reminders
- 31-60 days overdue: payment plan provided via email or phone call
- 61+ days overdue: third-party financing company contacted to collect payments
Some common occasions when payment instalment plans could be helpful are:
- When an invoice is for a large sum of money
- When the client has previously been late in paying their invoices
- When the company is going through difficult times and needs to improve cash flow
- When other forms of credit control have proved ineffective
If you're ready to offer your client customer financing, try our 'Past-due invoice negotiations' email template. You can send this to clients with overdue invoices to propose an instalment plan and encourage a sense of urgency by providing a response deadline to agree on a payment plan.
Which customers to give flexible payment plans to
Consumer financing is only suitable for some customers, and, as with any form of credit, customers with a good payment history should be the only ones who receive customer payment plans. If you haven't already, we recommend credit checking before offering your client flexibility in their repayments. Your business should be credit-checking all new clients before signing them.
Distinguishing good and bad payers can be helpful before deciding whether to offer your client or which customer financing options to offer. Check if they have had any failed payments from previous transactions. You should also consider the prevailing economic conditions, as payment plans may be more or less desirable to customers depending on the state of the economy.
Suppose you already have existing credit limits for the customer in question. In that case, staying within those limits when offering payment plans is essential, as not doing so can put your company at even greater risk.
Only offer buy now, pay later payment plans as the first point of call to customers you trust, particularly if you want to increase business with them. Consider whether the risk of delayed payment is worth a steady cash flow or will increase revenue if you encourage clients to take out a purchase plan on big-ticket items.
How to structure your instalment payment plans
For instalment payment plans to work, businesses need to set out clear terms and conditions in their contract, which include the following:
- When payment will begin (i.e. 30 days from when the invoice was raised)
- How much each payment will be
- How often recurring payments will be made
- Whether payments are automatically deducted (e.g. via a payment processor)
- The total amount of payment that is required by the end of the payment plan
- Any applicable late payment fees or interest charges
It's also essential to have a collection process when customers miss payment deadlines, which could involve anything from issuing a warning to suspending services or taking legal action.
Establishing your payment terms early with a client will make it easier for you, especially if flexible payment terms allow some discretion concerning accounts receivables procedures.
It is always helpful to keep clients updated about late payments and to be clear about what will happen if payment is received late.
An example template for a customer payment plan structure might look something like this:
- Day 1 - 25% of the invoice total
- Within 30 days - An additional 25% of the invoice total (for 50% in total)
- Within 60 days - An additional 25% of the invoice total (for 75% in total)
- Within 60 days - An additional 25% of the invoice total (for 100% in total)
Be flexible when you offer payment plans, such as payment plan options with varying amounts and frequencies depending on the customer's needs.
How to increase the chances of payment
Accept online payments or credit card payments to increase the chances of getting your customers to pay the outstanding balance. Offer a range between weekly or monthly payments to make it easier for businesses who want to spread the cost.
You can also make it easier when customers pay off outstanding balances, by allowing them to pay for their product or service on a financing platform. Let them input their credit card or bank account details on the payment system and integrate credit checks into the service. The customer will have to wait minutes for an outcome, and you can get help conducting credit checks and identifying low credit scores.
Consider allowing customers to spread the cost of their recurring payments across more than one debit or credit card to increase the chances that you get paid. Make it clear what payment method is available, and make it easy to input their payment details. Consider whether to allow customers to make the decision on whether to choose in-house financing or offer other loan capabilities with another financing provider.
Another way to automate the payment process is to set up a payment processor to take payment automatically. You could add minimal payment processing fees to this service to protect against the risk of late payment. Consider adding this to your customer checkout process.
An online payments system is also a straightforward way to show available customer financing options for your product or service. As a business owner, there is also less work for you as your options for instalment payments are all available online.
To understand your customer's requirements, we recommend a credit control phone call to understand their situation and find consumer financing options suitable for you and your client.
Incorporating instalment payments into your accounts receivables process
If you offer customer payment plans, you must incorporate them into your credit control policy and accounts receivable process to ensure that your teams are managing payment plans similarly. It will also ensure that customers don't receive preferential terms over others.
It would help if you also ensured that your accounts receivables team understands how payment plans work so they can deal with any queries or problems. Your payment plan terms and conditions should be clear and easy to understand so customers know what they're signing up for.
Consider including a late payment fee if payments are late to help to discourage customers from delaying their instalment payments. If you still need an accounts receivables policy, you can use our credit control and debt collection policy template as a starting point.
You can easily incorporate offering payment plans into your existing credit control measure by creating a 'payment plan offer' email template, similar to our payment follow-up templates, that you can send to trustworthy customers with overdue accounts and whom you'd like to offer payment plans. When it comes to making sure that payment plan instalments are paid on time, you need to be chasing them like you would an invoice payment.
Remember to make customers aware of the available customer financing options available. All your work as a business owner to accept payments from different sources will only matter if your clients know the flexibility exists. Be clear on whether you partner with another provider to offer loans or whether you are offering in-house financing options. Allow customers to make decisions on what works best for them.
Start with an email before the payment date to act as a reminder and follow up with more reminder emails if the payment isn't made. If necessary, pick up the phone and speak with customers about when you can expect payment.
Consider what your business can afford
Payment plans represent an excellent opportunity to help manage your cash flow, but you must understand what payment plans will mean for your business. If payment plan instalments are late, this could impact the profit made at the month's or year's end, which may result in a hit on your bottom line and prevent a steady cash flow.
Use cash flow forecasts to help you determine what payment plan instalments are affordable for you and your business, and stick to those amounts to avoid putting your business in danger to benefit others. Only offer buy now, pay later (BNPL) cash plans to customers who can't afford the cost upfront if you can be confident that your business can afford the delayed payment.
What are the benefits of offering payment plans?
There are several benefits associated with payment plans, including:
Increased revenue
Payment plans increase the chances of recovering unpaid invoices, which means you will often get paid more of the payment owed to your business. Adopting a more flexible approach to late invoices can help you recoup money that would otherwise be written off.
When you offer payment plans to customers, it acts as a way of increasing your customer base and selling more products or services overall. If you offer flexible payment options, it can be easier for your clients to pay, especially if they have been struggling financially.
An instalment payment option is also helpful for clients who want to purchase your products or services but cannot pay upfront. This payment method can help you get more of these customers on board, improve cash flow, and increase sales volume overall.
Increased customer satisfaction
A customer payment plan with instalments deducted from their credit or debit cards can make clients less likely to leave. This is because they feel like they are paying something towards an outstanding balance with no additional effort required. Allowing customers to make payments online can make their purchasing journey even more straightforward.
This increases customer satisfaction significantly, which helps maintain long-term relationships with existing clients and growing referrals.
Increased customer loyalty
Showing flexibility and compassion during trying economic times can help businesses maintain customer loyalty. Payment instalment plans can go a long way in demonstrating this commitment and help keep your customers coming back for more.
Customers might value how businesses offer financing as it allows them to avoid credit card interest. Not all customers that choose payment plans can't afford to pay upfront. They may be looking for interest-free loans that allow them to pay the purchase price over time and avoid the higher fees of a longer-term credit card loan.
Businesses like LoveBrands have built fantastic client relationships whilst saving time on their accounts receivables process by managing recurring payment plans through automation and personalised invoice chasing.
Reduced late payments
Offering customer payment plan instalments can also reduce the number of late or failed payments received. Late payments are not only frustrating for business owners, but they also affect the bottom line. In some cases, being able to offer customer financing may be the difference between making a profit or taking a loss on a sale.
Improved cash flow
When used correctly, customer payment plans can positively impact a company's cash flow - ensuring they have the money they need to cover costs and continue operating smoothly. When you allow customers to pay for their items over time, it ensures steady cash flow over the payment terms.
Customer financing can be an excellent option for companies seeking more customers. It's also an effective way of targeting new customers or clients who might not have the cash to pay in full immediately.
Reduced chance of third-party debt payment collection
A payment plan can reduce the chance of resorting to third-party debt payment collection. Preserve customer relationships without the stress of taking them to court as a way to collect payments. If your customer's company faces hardship, a third-party debt order can strain their business and your relationship even more.
Implement customer payment plans with ease
With Chaser, a payment plan is quick and easy to set up. We've made the process as simple as possible, making it easier for businesses of all sizes to automatically offer custom payment plans with their chosen amounts and intervals and automatically chase instalments.
Use Chaser and create, personalise, and chase payment plans automatically for free for 10 days
