You are about to land a major new client. Now it is time to negotiate the final contract. It is important to define your payment terms at this stage, but what terms are best for you?
Most companies, especially if they sell to businesses, go with the standard net 30, which 30 means your clients must pay you in 30 days. If you are a small business, this default payment term may not be the best for you. If your customers do not honor the stated term and pay you late, you are floating your client a credit. This float can really crunch your cash flow.
Here are some other payment term options to consider:
Option 1: Offer an Incentive for early payment
You could provide terms such as 2/10 net 30. This term lets your customer pay 2% less if they pay in 10 days and requires the full amount in 30 days. It is a win-win approach, you receive money faster and your customer gets a discount.
If you are worried about losing too much money with a discount, you can raise your prices by 2% to cover the loss.
Option 2: Stage payments throughout the work
You can ask for 30% at contract signing, 2 additional 30% payments at different stages and 10% at job completion. This is a common approach in the building and remodeling trades.
Option 3: Ask for a deposit up-front
If you will provide on-going service or deliver a project that spans many months, you could ask for an up-front deposit of one month’s worth of work. In this scenario, you would ask the client to pay you a deposit at contract signing.
You can then bill monthly (with net-30 terms) for work you complete each month. On the last month of work, you can apply the deposit to their payment. This way you are not floating money each month to a client.
Option 4: Request terms other than net 30
While net 30 terms are the most common, you have other options. You could request payment in 10 days or 20 days.
Tips to Improve Your Payment Flow
Whichever term you offer, below are tips to improve the speed your customers’ payments.
* Be Clear
Do not just state a net term (30, 20 or 10), state the actual due date. If you create the invoice on July 28, state the due date as August 27 (because July has 31 days.) If you list net 30 and not a specific date, your clients can interpret it as 30 days from when they receive the invoice.
* Send reminders
If your client is late in paying, send an email reminder (or make a phone call). If you send invoices via email, email can get lost in a SPAM folder. Alternatively, clients can truly misplace invoices in their system. Some accounting packages allow you to send reminders directly through the accounting software.
* Offer easy payment options
It has never been easier for any business to accept online payments. You can allow clients to pay you through many platforms, such as Pay Pal or Stripe. Note most of these online networks will charge interest and/or transaction fees. You can raise your rates to cover these fees if your clients want to pay this way.
* Save net 30 for repeat customers
You could only offer net 30 to customers that buy from you a second time or on a regular basis. You would then offer different terms (perhaps net 10) to all other customers.
* Walk Away
If clients ask for extended terms (such as net 60), you can decline the business. You do not want your client’s cash-flow issues to become your cash-flow issues. Not every potential customer is a good credit risk. Pay attention to your gut instinct. It is far easier to decline a new contract with a deadbeat client than it is to chase overdue invoices.
If you need help determining what net terms are best for your business, please contact us.
We would be happy to discuss the options.