Getting paid for invoices on time is the goal of every business. But that doesn’t always happen. Without clear, predefined rules to guide your customers, your business is more likely to face late, partial, or infrequent payments.
According to recent studies conducted by Atradius, among all invoices sent to customers, the percentage of late payments was around 49% in the United States, 40% in Europe, 88% in Australia and a staggering 94% .7% from India. Late payments directly affect your business revenue and mean you could end up making late payments to your suppliers, setting off an endless cycle.
A simple way to avoid all these consequences is to create well-defined payment terms. Payment terms are guidelines for your customers to follow. They clearly state what you expect from customers, thus avoiding problems that may arise later. This helps you get paid on time and saves you the hassle of missed payments. Plus, setting up payment terms with your customers means you can expect to get paid, which helps your business. cash flow.
In this article, you’ll be guided through the basics of payment terms, how to choose the perfect payment terms for your business, and tips for writing your own.
What are the payment terms?
Payment terms are specifications you give your customer regarding a sale. Typically, these terms include the cost of purchasing them, any advances you may need, their method of payment, and most importantly, when your payment is due. A common type of payment term is called Net D, where D refers to the number of days until your payment is due. Net D payment terms are used when you want your customers to know when you expect to be paid. Here are some other payment terms commonly used by businesses:
|Net 7||Payment due 7 days after invoice date|
|Fillet 10||Payment due 10 days after invoice date|
|Net 30||Payment due 30 days after invoice date|
|Net 60||Payment due 60 days after invoice date|
|Net 90||Payment due 90 days after invoice date|
|EOM||End of the month|
|21 MFIs||The 21st of the month following the invoice date|
|CWO||Pay with order|
|NDT||Pay the next delivery|
|COD||Cash on delivery|
|Payment by installments||Payments in previously agreed installments|
What are the ideal payment terms for a business?
There are no hard and fast rules when it comes to choosing payment terms for your business. It all depends on what your business sells. Not all companies can use the same payment terms, and different terms work for different companies. Here are the payment methods often preferred by companies in certain sectors:
• Most small and medium enterprises (SMEs) prefer Net 30.
• Manufacturing companies supplying consumer goods also use Net 30.
• Fashion and construction companies use Net 30 or 60.
• Independent businesses use Net 60 or longer durations.
Best Practices for Payment Terms
Before writing your own payment terms, check out these best practices:
• Some companies have found that setting their payment terms a little earlier than necessary helps them manage their cash flow better. For example, if you need your customers to pay within 15 days, try setting Net 10 payment terms to ensure you can pay your own vendors on time.
• Payment terms apply only after receipt by your customers. Make sure you send them to the correct address. If you’re not sure they were received, try a follow-up or confirmation call.
• Send gentle nudges to your customers to remind them to pay before they reach their due date. Review your previous transactions with this particular customer. If they tend to defer payment, then set stricter payment terms. Offer discounts to incentivize early payments and charge late fees for payments made after the due date to incentivize you to pay on time.
• When dealing with a small amount invoice, it is better to set shorter payment terms, such as Net 7 or 10.
Tips for Writing the Perfect Payment Terms
You can customize your payment terms to suit your business. These tips can help you improve them for better results:
• Before writing payment terms, think about what terms you and your customer can agree on and follow them.
• If your business sells a product or service that may change in price over time, try not to defer your billing until the end. Instead, update your payment terms and customer in sync with the progress of the purchase. This ensures that you bill your customers accurately and that they know what to expect from your bill.
• Be courteous. Invoices written in polite language are more attractive and better accepted by customers, which translates into better payment results.
• Be sure to write your terms of payment in such a way that your customers will find them clear and unambiguous.
Almost every business shares the common headache of getting customers to pay on time – or, in some cases, pay at all. Payment terms offer a solution by setting expectations and also reducing any confusion your customers might have. Try incorporating these tips and practices into your own payment terms for better results!
The opinions expressed in this article are the personal opinion of Prashant Ganti, Head of Product Management – Global TaxAccounting and payroll solutions at Zoho.