How to establish payment terms

If you’re wondering how to establish payment terms with a customer, there are a few key things to think about.

People always focus on the price, yet they get confused when asked, “so what are your payment terms?” And when you get asked that question, you need some answers ready.

Payment terms are all about offering someone credit. And that means, are they good for it?

Because once you issue an  invoice  and don’t take cash for your goods and services at the point of sale, you are offering your customer a line of credit. And that means you take on the risk of them paying late, or worse, not at all.

Now, let’s make one thing clear, the best outcome is to get paid immediately. The best invoice you can issue is one which acts as a receipt.

For many businesses, especially in the B2B world, payment terms must be negotiated, alongside the price. With B2C businesses, there often is more of an opportunity to dictate good terms, for you the business owner, right from the start.

Examine your cash flow

We asked accounting expert Nicky Larkin for her opinion on how to establish payment terms. She has wide experience in setting up finance teams and systems, managing all aspects of financial and management accountancy, installing best financial practice and gaining company financing.

Nicky told us: “To establish payment terms, its key to look at your cash flow, because it’s really important to ensure that you have sustainable cash to grow your business, it’s very easy to have a profitable business, but actually you could be over trading and your growth could be stunted because you have a lack of cash.”

And, it’s fair to say, that most of your customers will be looking for good terms and those terms could make the difference between winning a deal, or not. So, you must be detailed.

First, there’s that question, are they good for it? You should always check companies and individuals out, especially if you are offering a lot of credit. There are services available which can give you a good steer on a customer’s financial standing and likelihood to pay. But don’t forget, that no matter how many reviews you received about a company, on the day it comes down to whether they can pay on the agreed date. Trust your gut.

Ask yourself how well do you know a company or the individual buyer? What are people saying about the company online, or better still, are you able to speak to any suppliers who already deal with the company? What do they say about them?

How to establish payment terms

How long can you wait?

So, next question is how much credit do you want to give them and for how long? It’s a good discipline for every company to adopt with a new customer, no matter how big the order, or attractive the margin. Be wary of companies that will use you to bankroll their business – selling your goods, taking the money and then delaying payment to you.

The most common terms offered to companies is 30 days, which is a fair amount of time that suits both parties. Which might be an odd thing to say, from the seller’s point of view, but don’t forget that those 30 days can be as important to you, as the buyer, as it’s time for you ensure that your products are delivered on time, are up to the job and perform as expected. Likewise, with the services you offered, what you promised and what was expected? It’s a fair breathing space for both parties.

Some companies require you to give them 60 days, or even 90 days (which are not uncommon requests, especially in certain sectors), but if asked for this, you must ensure you have the cash flow to withstand it. You must ask yourself a very honest question, can I afford not be paid for 60 or 90 days, effectively two to three months, for these goods or services. And that’s not the only question. You have to say to yourself, two to three months is a long time in business, so your risk of not being paid has increased.

Payment terms are part of the negotiating process. Less than 30 days is great and anything over 30 days requires you to make sure you can afford it.

And don’t forget that these terms must be on your invoice . They must be clear to your customer and confirmed in contracts, letters, or emails. They must not become an issue between the negotiating parties. You can find out more about the various payment terms in our article on how to create an invoice article.