Your terms of payment let customers know when and how you expect to be paid. Setting your terms and letting your customers know your expectations gives you better control over your business and a useful platform for resolving potential payment issues.
Setting terms of payment shouldn’t discourage regular or new customers from doing business with you – it can pay to give customers a number of options.
Encourage customers to buy from you by removing barriers to the sale. Make the purchase as easy as possible through a variety of ways to pay.
Take the time to become familiar with all these options and their relative pros and cons.
You might, for example, decide to accept only the major credit cards or offer a discount for cash, or give your staff leeway to negotiate cash discounts if customers request this.
It’s worth researching the generally accepted payment terms in your industry and terms competitors use. This doesn’t mean you have to follow suit. You may be able to spot a gap or opportunity to be more flexible. These examples could build a competitive edge:
Payment in advance
Some businesses, such as ones operating over eBay or other auction sites, require payment in advance to provide protection against possible online fraud.
Be wary of relying on a fax of a bank deposit, or email confirmation not sent directly from the depositing bank as proof of payment.
"Selling on credit terms can expose your business to delayed payments or outright loss"
These can be useful if you are working on a lengthy project, such as a building or a software development program. Progress payments serve two important purposes: they provide a regular cash flow to pay running costs, and they protect you against total loss if the client goes bust. Normal practice is to build progress payments into contracts, based on measurable milestones.
Early payment discounts
Early payment discounts can encourage people to pay on time. They are more useful on higher margin products or services as the discount will have less impact on your profit than thin-margin products.
If, for example, you offer customers 60 days credit, consider a 5% discount for payment within 30 days. Some customers will try to claim discounts after the due date. It’s in your interests to politely but firmly point out your terms of trade. If you don’t stick to them, your customers won’t either.
Contracts and debit orders
Businesses that offer regular services such as a gym or an accounting firm can benefit from offering customers a set annual (or longer) contract. The attraction for the customer is a price that is typically lower than paying for each visit or service. Spreading the cost over 12 monthly payments can also make it easier for them to manage their budgets. Meanwhile, your business benefits from a regular cash flow. Requiring the customer to set up a debit order also eliminates time spent chasing payments.
Selling on credit terms can expose your business to delayed payments or outright loss, which can play havoc with your cash flow. Some rules to help you:
By now you’ll have a good idea of payment terms that could suit your business. Run your choices past your accountant, bank manager or lawyer for their input.
Bear in mind that your terms should attract customers, not turn them away. If you don’t accept credit cards or you add a surcharge for credit card payments, for example, you might lose sales. In this case, weigh up the extra costs of accepting credit card payments against the business you might otherwise lose. It’s your decision.
Communicate your terms
Whatever your payment terms, communicate these clearly in your terms of trade and in your business signage. For example, don’t frustrate shoppers who arrive at the till with their selections only to discover you don’t accept credit cards.
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