Getting paid correctly and on time by customers can be a constant frustration for business owners. Communicating your terms is the best way to ensure you aren’t out of pocket or 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 informing customers about your expectations gives you better control over your business and a useful method 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 different options.
Remove any barriers to a sale
Encourage customers to buy from you by removing barriers to the sale. Make purchases as easy as possible through a variety of payment methods, including:
- 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, offer a discount for cash payments or give your staff leeway to negotiate cash discounts if customers request them.
Know your industry’s norms
It’s worth researching the generally accepted payment methods in your industry and the terms your 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 help you 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 offer to your customers to choose from. Sometimes it’s best to use a method that works for both of you.
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 faxes of bank deposits or email confirmations 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 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 involves building progress payments into contracts, which should be based on measurable milestones.
Early payment discounts
Early payment discounts can encourage customers to pay on time. They’re typically 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 a 60 day credit, consider a 5% discount if payment is made 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 gyms and accounting firms, 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 any time you would spend chasing down payments.
Selling on credit
Selling on credit terms can expose your business to delayed payments or outright loss, which can seriously disrupt your cash flow. Some helpful rules include:
- Developing or adapting a credit application form – your bank manager can help with the details.
- Asking customers for business references and permission to run a credit check.
- Setting agreed credit limits.
- Clarifying your payment terms – 30-day and 60-day terms are the most common.
- Explaining any interest charges you’ll impose on late payments.
- Getting your customers to sign acceptance of your conditions to prevent future arguments.
- Monitoring any overdue payments or orders that may breach agreed credit limits.
Choosing your payment terms
By now you should have a strong idea of what payment terms could suit your business. Remember to 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. For example, if you don’t accept credit cards or add a surcharge for credit card payments, you might lose out on easy sales. In this case, weigh the extra costs of accepting credit card payments against the business you might otherwise lose. It’s ultimately your decision.
Communicate your terms to customers
Whatever payment methods you go with, be sure to communicate them clearly in your terms of trade and in your business signage. For example, don’t frustrate shoppers who arrive at the cashier to discover that you don’t accept credit cards.
