Credit terms, sometimes referred to as payment terms, are set by businesses and are applicable on all credit sales. When a purchase is made, the client receives an invoice stating that their payment is due within a certain number of days after the product or service is delivered. Businesses have to properly create and manage these terms to avoid late payments, clients not paying at all, and the consequences that comes along with both. Even if a customer pays their invoice within the terms, the wait for the money might have a negative impact on the business is some way. Here are just a few of our tips to make sure your credit terms are working in your business’s favor:
Avoid long credit terms, if possible.
As mentioned above, if your client is paying within your credit terms, you can still be waiting around for that money that you most likely need to continue operation. Common terms are 30 days, but some business use 45, 60 or even sometimes 90 day terms. If you’re experiencing cash flow issues and have a longer payment term, try addressing that first.
Try offering your customers incentives.
Incentives can be used to not only boost business, but to encourage on time (or even early) payments. You shouldn’t use too many incentives at once, but incentives like a coupon for new customers or a discount for early payment can prove to be very effective. Here are a few examples:
- Free shipping for repeat customers
- Discount the invoice if it’s paid early. A typical discount is 2% off if paid within 10 days, but set up a percentage that works for you and your business.
- Offer rebates, coupons, or other rewards if a client makes multiple prompt payments back to back.
Implement and enforce late fees.
Most of the time, if a late fee is involved, clients will quickly learn to pay on time. Try using this method to deter people from paying late to begin with. However, if you set these fees or penalties too high, it could turn customers away. When using late fees, be sure that the terms are clearly and simply stated on the invoice and that you’re transparent about them existing in the beginning g any client relationships.
Consider requiring partial payment upfront.
If you secure part of the payment beforehand, you’re eliminating a lot of risk and lessening the chance of a late payment. Consider doing this only in certain circumstances, like a very large order or job.