Finance

Your Guide to Terms of Payment

Business Advice | 1 August 2023 | 11 months ago

Your Guide to Terms of Payment

Terms of payment are a standard part of almost any business, but when you are starting out, you may be unsure of what to include. It’s important to set the right terms of payment for your business and customers, to ensure seamless cash flow and payment processing. When it comes to deciding your terms of payment, you have a lot of options to choose from. Here are some of the most commonly seen terms of payment examples:

 

  • Net 7, 10, 30, 60 and 90 – Net 30 means that payment is due within 30 days from the invoice date. As a terms of payment example, if an invoice is issued on July 1st, the payment is expected by July 31st. Net 7, Net 10, Net 60 and Net 90 work in the same way, but with payments due 7, 10, 60 or 90 days after the invoice date.
 

  • EOM – EOM, which stands for end of month, means that payment is required at the end of the month that the invoice was sent in. Using the payment term example of an invoice being sent at any point during August, the payment should be made before the end of August.
 

  • COD – COD, or cash on delivery, requires payment at the time of delivery of goods or services. This is often used for quick transactions or small transactions, or when there is a level of trust concern between the parties.
 

  • Advance Payment – This is when a customer makes a partial or full payment before the goods or services are delivered. This is common for custom projects or large orders, and it means that a business doesn’t lose out financially should the customer change their mind.
 

  • Milestone Payments – With milestone payment terms, payments are made in instalments, based on the completion of specific stages of a project. This is common for ongoing projects, and the milestones should be decided between the business and customer beforehand.
 

What to Consider

There are a lot of payment terms to choose from, and you need to decide what’s best for your business, without negatively impacting your customers. With so many businesses out there, customers have the freedom to choose a business with payment terms that work for them. Here are some of the key things to think about when you are setting your terms:

 

  • Your Industry – When you are deciding your terms of payment, consider your industry and what it considered typical for businesses like yours. It’s always a good idea to align your payment terms with the typical payment terms in your industry. Take the time to research and understand what other businesses are doing, and what your customers have come to expect. Different industries have different norms for payment periods, and ensuring that your business aligns with standard practices can boost customer satisfaction. You should also analyse the payment terms offered by your direct competitors.
 

  • Cash Flow Needs – It’s important to factor your cash flow requirements into things when you are setting your payment terms. Though longer payment terms can be beneficial for paying customers, and they provide a lot of flexibility, they could impact your cash flow negatively. Shorter payment terms can improve cash flow, but may affect customer convenience. You need to find a balance between setting terms that work for your customers, but also work for your cash flow needs.
 

  • Transaction Size – You should also think about the size of the transaction when you are setting your payment terms, as larger transactions may warrant a longer time to pay, to give the customer time to get the funds together. Some businesses also change their payment terms slightly for custom projects and large orders, asking for milestone payments or partial upfront payments. This ensures that the business doesn’t lose out financially if a customer were to cancel their order after work had begun, a form of financial safety net.
 

  • Buyer and Seller Relationship – Consider the relationship between the buyer and seller, you and your customers, when deciding your business’ payment terms. If you have a good relationship with the buyer, you might be able to offer more lenient payment terms. Long term and reliable customers may warrant more favourable payment terms, while new customers or those with uncertain credit history may require stricter terms. Though it’s easier to have similar payment terms for everyone, offering flexibility to reliable customers shows that you value them. To retain customers, you need to make using your business as easy as possible, and payment terms have a big impact on that.
 

When you are setting your payment terms, be clear and concise, ensuring that there’s no ambiguity. You don’t want to end up with customers reading the payment terms, and being incorrectly informed about when payments are due. Avoid using jargon or confusing language, and make sure that everything is in writing. If any problems or disagreements arise, both parties can refer to the payment terms. The more information you provide, the simpler customers’ understanding of your terms will be. More than anything the payment terms you choose should strike a balance between meeting customer needs and protecting your business’ finances.

 

It’s a good idea to regularly review and adjust your payment terms as your business evolves, and make sure to keep customers up to date with any changes. As your business grows and your cash flow improves, you might find it easier to handle longer payment terms. Finding a balance between attractive terms for customers and maintaining your cash flow is key.

 

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