Setting payment terms

Offering credit can be a great thing for your business but it could fall flat if you don't have the right payment terms.

With Australian firms currently averaging more than 50 days to settle their accounts you need to do everything you can to ensure you are paid promptly.

You've decided to extend credit and you've run a credit check to ensure the customer is a good risk. Now it's time to set your payment terms. Payment terms - which are a statement of when you expect to be paid - help ensure you keep your cash flow in check and are designed to protect your business from cash flow shortages and late payers.

Payment terms can be set at seven, 14 or 30 days however, most firms apply 30 day terms. While many customers would undoubtedly prefer longer to pay, shorter payment terms can have benefits for your business. When it comes to making a decision on the payments terms you set, it's recommended that you choose an option that protects your
business' cash flow.

Whatever you decide, you need to be prepared to stick to these terms. As a small business you need to make sure you set the right payment terms so your cash flow stays strong. Follow these steps to protect your business
from late payers.

1. Establish a credit agreement

Once you've decided to offer credit to your customers, you need to communicate the terms of the agreement in writing. Develop a credit agreement which sets out your payments terms, what you expect of the client and what you will  provide in return.

It doesn't have to be a particularly complicated document or something that takes a long time to prepare but it does need to be clear. The key things you should include are:

  • services you are providing and when
  • what the customer must pay and when
  • how disputes will be settled
  • penalties for late payment.

This agreement should also state clearly the consequences for breaking the agreement.

2. Include a late payment clause

You have a right to claim reasonable interest, late fees and/or collection costs for payments past the due date.

Consequently, it is becoming increasingly common for firms to charge a fee if a customer pays late. If you opt to utilise this approach as a deterrent against late payment it is important that you include a late payment clause which outlines
the penalties for delayed payment in your credit agreement. A clause such as this will also cover your costs in waiting for or collecting payment, ensuring you are not out of pocket when the money comes in. Just make certain you are being reasonable when enforcing any extra charges.

Unfortunately for some, this clause might not be enough and an empty threat will not help your case. If you do find a customer disregards your payment terms, you need to be prepared to enforce the clause by charging interest and claiming costs if you engage a collection agency. This is particularly important with customers that regularly flout your
payment terms. It is your prerogative to let one or two invoices be paid after the due date however, at some stage you will need to put your foot down to ensure you are not being taken advantage of time and time again.

3. Be aware of changes

Watch out for any documents from your customers that indicate changes to your payment terms. If your customer is unhappy with the terms, they can legitimately request amendments and if any document they send you contains  different terms, which you fail to acknowledge or challenge, their terms take priority.

By accepting an order from a customer under these terms you are accepting the amended agreement. For that reason, it is essential that you carefully read all documentation sent by your customer to make sure you don't over look any detail that can disadvantage your cash flow position. You don't want to be left with unfavourable payment terms because you didn't spend the time to read the correspondence.

It is common for larger organisations to pay under longer payment terms, sometimes up to 60 days. For obvious reasons you would prefer payment under your terms however, as discussed above, you must be thorough when reading documentation from the client to make sure you don't unwittingly agree to different terms. With some firms, larger organisations in particular, you may choose to negotiate slightly on your terms to accommodate their existing processes.

Ultimately it is your decision to adjust your terms but keep in mind that bigger firms could end up being excellent long term customers. It may be worth your while to be a little flexible.

4. Communicate payment terms in each invoice

Make sure you communicate your payment terms regularly in writing. Your customers are not mind readers so if you don't tell them what you expect and within what timeframe, they will make their own assumptions.

Consequently, you should reiterate your payment terms on each invoice, even if your terms are included in the credit agreement.This will provide the accounts payable officer with a way of quickly determining your payment terms without having to pull out the original credit agreement.

5. Raise another invoice

If a customer fails to pay on time get their attention by raising a secondary invoice including interest or late payment fees. This will remind your customer of the outstanding invoice and reiterate your charges restates your intention to claim interest or fees as part of your payment terms.

Statements are another pointed, but friendly, way to bring attention to outstanding amounts, particularly if the client has more than one invoice overdue. Both secondary invoices and statements are a great approach to reinforce the terms and conditions of the credit agreement and show your customer that you will not accept late payment.

6. Customers who pay late

If you have a customer who continually pays after the due date  or advises you of their intention to pay outside your payment terms, you should weigh up how important their patronage is to your business. If this is the case, it could be worthwhile considering asking for payment upfront or on delivery rather than offering credit.

For the sake of your cash flow, you need your customers to pay on time.

When a customer advises you of their intention to pay outside your payment terms, make sure you demand payment under the previously agreed terms for existing invoices. If the invoices were raised under the current credit agreement your customer should pay within these terms. It is acceptable to change the terms for future services however, the current terms should be enforced. Don't let your customer dictate the terms under which you get paid.

 

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