When starting a business, the question of payment terms will constantly nag at you because, at some point, you’ll have to draft them before you enter into transactions with clients.
Payment terms become necessary if you run a business that deals with invoices. That is especially true for freelancers who are generally paid after project completion. They must learn how to set terms of payment that work for them while also making things easier for their clients.
What are Payment Terms?
When talking about payment terms, we’re referring to the conditions that govern the transaction relationship between you and your customers.
As the seller, you have expectations for your business. The conditions you set are meant to outline when and how you want to receive payments from your clients.
You and your client must also come to an agreement regarding the terms of payment before you officially start doing business with them.
What are the Different Payment Terms?
Payment terms tend to reflect your business needs, and if it’s a small business, all the more reason to come up with terms that protect your interests.
Here are standard payment terms you may use for your small business invoices:
- Net 10, 30, 60, 90: in these terms, payments should be cleared within a specified timeframe—for instance, Net 10 means within ten days.
- Payment in advance: means upfront payment on a product or service. Deposits also fall under these terms.
- EOM: similar to Net 30 as the sender expects payment at the end of the month. The only difference is some months don’t end in 30 days.
- Upon receipt: in this invoice payment terms, senders expect payment when the customer receives the invoice.
- 15 MFI: these payment terms specify a date following the month the invoice is received.
How to Choose Payment Terms for Your Small Business
People come up with varying payment terms depending on their circumstances. It may have to do with the type of product or services they offer or even the environment.
For instance, a small business owner in a city could offer certain payment terms that wouldn’t be ideal for a business owner in a small town.
Additionally, small businesses need regular cash flow because they don’t usually have enough reserve to accommodate prolonged payment interruptions.
As such, when choosing payment terms for your small business, here are things to consider:
When setting up payment terms for the invoices, the first thing to keep in mind is what your business needs. You may be inclined to be as lenient as possible, but it shouldn’t be at the expense of your business.
Since you’re running a small business, it’s crucial to have a steady cash flow. Consider your reserves and options in case of late payments, especially large amounts, which could compromise daily operations.
- Client Consideration
While putting your business first is the whole point of running one, you don’t want to disregard customer expectations. If you alienate them with your terms, you may lose them, and that’s bad for business survival and growth.
It’s vital to be considerate of your clients because not all of them will have the means to comply with your payment terms.
Having terms like “upon receipt,” which fully serve your interests, may not work in certain circumstances. Consider those circumstances and, if possible, discuss payment terms with clients before working together.
Another alternative that shows consideration to your clients is treading the middle path by offering reasonable terms that work for both sides.
- Invoice Amount
You may also use the amount of the invoice to determine payment terms. It makes sense to ask for immediate payments when dealing with small sums rather than large sums.
Even though large sums can wreak havoc on your business when delayed, it’s important to allow clients an extended period to come up with the money. A middle path when it comes to large sums is asking for a percentage of the total as a deposit.
- Industry Standards
Industry standards can also affect your decision when setting up terms of payment. You don’t want to offer terms that are out of the ordinary in your industry, as this could leave you with disgruntled customers.
Consider what’s usual with the type of business you’re doing before choosing payment terms.
Final Thoughts
Payment terms are a vital part of your business. They don’t just affect business operations and profitability. They also affect your relationship with clients. Hopefully, these tips will come to your aid when choosing payment terms for your small business.