Payment terms 101
It would seem strange to invoice a customer for payment in 30 days who’d just ordered a pizza from you.
Deciding how and when your business is paid depends on what you’re selling, what is involved in producing the goods and services and how much risk the transaction exposes to the business.
Lisa Legena, business advisory services manager with the Small Business Development Corporation (SBDC), says payment terms are the conditions under which you allow customers pay for your goods and services.
“Typically, they outline how much time customers have until they must complete payment, whether a deposit is required or if they must pay on delivery,” she says.
Payment terms should be guided by what kind of service or product is provided.
Things are usually reasonably straightforward for a fast payment transaction like buying groceries or paying for a haircut.
But when a customer is not expected to pay immediately after a product or service has been received, you need mechanisms in place to issue invoices and track any later payments.
There is a myriad of options for a small business to consider when they’re working at how they will get someone to pay.
Payment terms can affect a business’s goals by influencing their income, costs and cash flow.
It is important to select payment terms which don’t leave you too much out of pocket as you may run the risk of becoming insolvent.
For instance, if you operate a business where you install a kitchen for a customer you will have some upfront material and labour costs before the installation can occur.
If your payment terms don’t allow for an upfront deposit, you could find yourself out-of-pocket for a long time while you are waiting for remittance after completing the work.
SBDC business adviser Sonja Kanban says payment terms should be communicated and agreed to upfront, before any goods or services are supplied.
“If you are providing credit to customers you have not traded with before, it is important to undertake due diligence and ensure they have the means to pay,” she says.
“It is essential to check trade references, credit history and how they generally operate before you allow your business to become too exposed.”
It is a good idea to obtain an upfront payment or a deposit for products and services which will be delivered over a long period of time or where you may be required to outlay a lot of money to provide the product or service.
Some business owners build in milestone payments to keep control of their cash flow and to minimise the risk of non-payment.
As a rule, in business when you agree to do a job you must decide on the terms of payment as well.
Have strategies in place to invoice people as soon as you have completed work and follow up promptly on any late payments.