Setting payment terms
Sending a clear message to customers about when and how you expect to be paid will help you manage cash flow and maintain good customer relationships.
Payment terms define what credit facilities you will offer customers. Standard terms for credit include payment within 7, 14 or 30 days after the invoice date. Setting your customers' terms shorter than your suppliers' terms can help you avoid being out of pocket.
Many businesses exposed to credit risks will offer other types of payment options or request that customers pay part of the invoice before or during service delivery.
Things to consider when setting payment terms include:
- types of payment
- credit limits
- early payment schemes
- legal requirements
- customer credit worthiness.
If you decide to offer a credit option, consider making it your policy to conduct a credit check, particularly if you risk being exposed to a large single debt. The credit check application form should specify all terms and conditions.
Check the costs involved with credit card and other electronic transactions. You may need to add a surcharge to cover them.
Make sure your payment terms are clearly displayed on your invoices.
Debtors may need to be encouraged to pay early or on time.
Some businesses offer discounts or other incentives if a payment is made before a certain date. This should be strictly controlled so those who pay late do not receive the incentive. Some businesses impose penalties for late payments.
Some other common incentives include:
- chasing debts on a regular basis
- making sure the collection process is professional, polite and firm
- offering payment plans for customers struggling to pay
- refusing to supply further goods or services until bills are paid.
Many businesses carry merchant facilities with them, such as mobile EFTPOS or credit card devices, to get paid as goods or services are delivered. This prevents any debt risk to your business and provides customers with a convenient payment option at the point of sale.
Payment and credit policy
Your payment and credit policy should support your business goals. A clearly defined payment and credit policy helps promote understanding and reduce conflict with customers over payment and credit issues.
All staff should be trained to implement your policy. Document and publish it for all customers and staff to see. This is a good way to promote your business as transparent, fair and honest.
Your payment and credit policy should include all of your payment terms. It should also include sections that tell staff how to:
- accept payment — including receipting procedures for cash and credit card payments
- extend credit — enabling a number of staff to implement decisions on how you will check client credit worthiness
- collect debts — when and how to begin following up outstanding debts.
Debt collection procedures may include any of the following:
- when to send out statements asking for payment
- how to display necessary information about payment terms
- when to phone debtors to remind them of the debt
- when you will ask debtors to pay by a certain date
- circumstances when you will negotiate payment plans
- when to ask for spoken agreements in writing and what to ask for
- when to engage a debt collection agency to collect the debt.
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