Payment terms are conditions that are added to a sale. They are typically sent together with invoices, and they tell clients when and how to buy the goods and services they have bought from your business. The terms can include when the business expects payments, the different payment options available to clients, and discounts for early payments or late fees. They help set expectations between the business and its clients, helping to ensure consistent cash flow.
Common Payment Terms
Common payment terms include advance, immediate, dated, and partial payment terms. They also include details for any discounts that could apply.
Advance payments are a great way of reducing the risk associated with cancellations and losses. They can be full or partial payments depending on how the payment terms are structured and can be a critical source of funds for completing a project and ensuring timely delivery.
Payments in advance are paid fully before projects start while ‘50% upfront’ sets terms for half of the payment upfront. The latter is typically used in long-term projects, so the client and business take equal risk.
Cash before shipment and cash next delivery dictate that the funds should be paid before the business ships the product or before the next delivery.
These are typically called cash on delivery terms where the client pays as soon as the product or service is provided. Cash in this context is any payment method that the business accepts.
These are set as the number of days the full amount should be paid after the invoice is sent. For example, a term of N/30 set for an invoice sent on January 15th should be paid before February 14th.
The terms can also be set at the end of the month where the payment should be completed by the end of the month. This is the month the invoice is sent. Dated payments require the business to use its own funds to complete the project thereby taking all the risk.
These terms allow the client to pay in installments over an agreed period. Lines of credit also fall under this category where the business gives a client credit they have to pay in installments. This works as a loan with the business taking the risk if a customer defaults.
Tips for the Best Outcomes
Always negotiate the payment terms with clients before the commencement of any project. This ensures everyone understands the expectations and roles they have to play.
You can also provide shorter payment periods if you use online and ACH payment options. These options reduce the need to set a long payment period. If accepting ACH payments, businesses can use verification services to reduce fraud. Businesses can opt for options like Yodlee ACH payments that ensure they get paid faster. The Yodlee ACH payments option also includes account verification for your peace of mind.
Understanding different payment terms and providing the best ones can ensure better client and customer relationships and improve cash flow. They also eliminate friction as everyone understands what is expected of them.