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How to Get Better Payment Terms As A Business Owner

Tips to Boost Your Business’s Credit Score

Are you a small business owner in some serious need of improving your cash flow? One of the first places that you should investigate are the payment terms that your business currently has in place when sending and receiving invoices.

What Are Payment Terms and Why Are They So Important For Small Business Owners?

Payment terms are the conditions under which a buyer or vendor finalizes a sale. Typically, payment terms address topics like when payment is expected (the norm is 30 days after the invoice date), acceptable payment methods, discounts that are offered, or any other provisions like down payments or cash advances.

Payment terms are important for small business owners because they ensure that you are compensated for your product or service so that you can cover your own business expenses and overhead. In other words, if you aren’t paid, you can’t maintain a positive cash flow, which can lead to dire circumstances like bankruptcy.

Payment terms can also help with creating a consistent schedule that will guide your budget. Knowing when an invoice will be paid can help you determine when you can pay your overhead like rent and employee salaries.

To help you avoid running out of money for your business, you should arrange for the best possible payments for your business. And, you can accomplish that by following these easy-to-implement tips.

Negotiate Early on Mutually Beneficial Terms

Before you and a client settle on an agreement, you should negotiate immediately on term that are mutually beneficial for both parties. For example, if you are uncomfortable with the industry standard of Net 30 and prefer a net 7, but your client is not, then split the difference with a Net 15. You’re still receiving payment earlier than 30 days, but the client isn’t responsible for paying the invoice in just a week. However, because they are speeding up the payment process, you may have to sweeten the pot a little by offering an incentive like free shipping or a 2/10 Net 30 where there is a 2% discount if paid within 10 days.

You should also discuss down payments for larger orders or payments so that you can cover your overhead until the final payment has been received. Determine an absolute minimum amount that you’ll accept as a down payment. In most cases, 25% is acceptable for both parties.

Also consider being flexible with payment options. Some clients may only prefer to pay you through PayPal or check. Which method is going to get that money into your account more quickly? PayPal, of course. So, create an account so that the client can pay you via their preferred way, but you’ll also be receiving the funds almost instantly.

Remember, when negotiating on terms you want to look for a win-win situation. You and the client should walk away feeling satisfied with the terms. Start this early so that no one is caught off when an invoice arrives.

Frequent Communication

Let’s say that you have a client that you don’t have a great rapport with. Let’s say they suddenly emailed asking you to jump into a project ASAP. You also have a client who you are friendly with and communicate with often. They also just emailed you asking for to work on a project. Who are you going to make a priority?

Frequent communication with a client can help strengthen the relationship between you and a client. This comes in useful when you have to change or negotiate payment terms. Because you have this solid relationship, they should be more inclined to agree on terms that are a little more in your favor.

Just like negotiating, you should work on communicating with the client as early as possible.

Discounts and Overdue Fees

Offering an incentive is one of the best ways to secure a better payment term for your small business. The 2/10 Net 30 was already mentioned, and that’s one of the most common discount that you can provide. However, depending on your business, there are plenty of other incentives and discounts that you can offer. It could be coupons, discounts on large orders or projects, a sliding-scale, or free shipping.

On the other end, you should ass overdue fees. This is the interest rate that you’re going to charge a client if they miss the due date. It sound harsh. However, if the client is aware that there will be a penalty if the invoice is not paid by the due date, it should be enough to motive them to accept your terms. Keep in mind though, that you should be reasonable with overdue fees. You don’t want to go overboard and charge an excessively high fee. To determine the overdue fee, settle on a flat monthly rate.

Shorten Your Terms By Being The Best

You’re reliable, meet deadlines, and deliver high quality work. Your client shouldn’t have an issue with shortening the payment terms from 30 days to 10 days, for example. Let your work speak for itself and you can make a case for getting paid more quickly.

Have a Backup Plan

What if you believe that you have submitted a fair payment terms, but the client rebuffs? Are you going to stumble and be forced to go back to the drawing board? Or, can you immediately respond with a counter offer.

There will be times when you and the client don’t see eye-to-eye on payment terms. Instead of getting caught off guard, anticipate multiple outcomes. This way, you can go right back to the client with another set of preferable terms.

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We uphold a strict editorial policy that focuses on factual accuracy, relevance, and impartiality. Our content, created by leading finance and industry experts, is reviewed by a team of seasoned editors to ensure compliance with the highest standards in reporting and publishing.

Freelance Writer at Due
Albert Costill graduated from Rowan University with a History degree. He has been a senior finance writer for Due since 2015. His financial advice has been featured in Money Magazine, Fool, The Street, Forbes, CNBC and MarketWatch. He loves to give personal finance advice to millennials.

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