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What Are Payment Terms and How to Get Customers Pay Faster
For small businesses, having a healthy cash flow is crucial. With cash in hand, they can cover business expenses and make investments for their growth.
Unfortunately, 54% of small-to-medium enterprises (SMEs) expect payment delays from customers. As a result, they waste 4 hours each week chasing late payments, which means lower productivity.
If you face similar problems, don’t fret. This article will show you how to avoid payment delays and get paid faster by having strong payment terms.
What Are Payment terms?
Usually included in an invoice, it contains details such as the product description, total amount due, accepted payment methods, due date, and late fees. In some cases, you can also include discounts and special terms previously agreed upon.
Invoice Payment Term Example
To better understand how an invoice payment term looks like, let’s look at the following invoice created in Peakflo:
In this example, you can see that:
- The top section specifies the customer name, address, and invoice details, such as the invoice number, invoice date, payment term, and due date.
- Below that, you’ll find the product description, unit price, quantity, tax, and amount per item. On the lower right of the table is the total amount due for payment.
- The final section is where the payment terms are mentioned. Here, you can include your bank information, accepted payment methods, and interest rate for late invoices.
Types of Payment Terms
Below are several types of payment terms commonly used in business:
Payment is made in advance, before the delivery of goods or services.
Payment is made 7 days after the invoice date.
Payment is made 10 days after the invoice date.
Payment is made 30 days after the invoice date.
Payment is made 60 days after the invoice date.
Payment is made 90 days after the invoice date.
Payment is made at the end of month.
Payment is made on the 21st of the following month after the invoice date.
Payment is made in cash upon product delivery.
Letter of Credit
A credit document issued by a bank to guarantee payment, usually used in the export industry.
Bill of Exchange
The customer promises to pay at a later date, usually backed by a bank.
Apart from these common payment term examples, there are also discount payment terms:
Discounts given to customers that make large purchases.
Discounts given to disabled clients.
Discounts given to students.
Discounts given to employees.
Discounts given to customers who pay with cash instead of credit cards.
Why Are Payment Terms Important for Your Business?
As 82% of small businesses fail due to cash flow issues, it’s clear that maintaining a healthy financial state is essential to keep your company afloat.
To achieve that, you need to make sure customers pay on time – this is where payment terms come into play. By improving invoice to payment terms, you can inform clients when the payment is due and the consequences that come with paying late.
There are a lot more benefits of implementing payment terms for your business:
- Improve cash flows. Knowing when a certain amount of money will be delivered to your account helps you project cash flow more accurately. As such, it becomes easier to plan for taxes, business operations, and growth investments.
- Maintain good relationships with customers. Through payment terms, clients know when to pay on time, and your business will receive the pay according to schedule. This will prevent miscommunications, establishing a stronger sense of trust between your business and other parties.
- Solve disputes faster. Having a detailed payment term will avoid unnecessary back-and-forth communications with clients, clearing out payment-related disputes faster.
- Cut costs. Late payments can affect the working capital of a company, which may risk business operations. Companies end up taking out loans with bigger interests to keep their operations going, which otherwise can be covered by the payments they need to receive. As payment terms help get you paid on time, no need to worry about payment delays. Plus, you can keep your operational funds and expenditure intact.
How to Use Payment Terms Effectively and Get Paid Faster
When it comes to business transactions, you’re not only dealing with one or two customers; but many. While there’s a general agreement between the head of business or accounts with the customers, some business may adopt different payment terms than others.
As such, keeping track of customers’ payment terms becomes a challenge, both for small and big teams.
This makes it important for business owners, finance leaders and employees, or even any customer-facing members of the organization to be informed about different types of payment terms.
Let’s take a look at them, and find out the best practices for each type of payment terms to get your business paid on time:
A prepayment refers to the condition where a customer settles a debt or bill before the due date.
For instance, a vendor and a client have agreed to a NET 60 payment term. If the client pays the full amount within 30 days, then it’ll be considered a prepayment.
The best practice here is to keep a tidy record of the prepayments. An accounts receivable workflow such as Peakflo makes it a breeze to manage prepayments.
Easily add prepayments made inside or outside of Peakflo. All prepayments will also flow not only to Peakflo but also to your integrated accounting software. This eliminates the need for a manual data entry usually done on a spreadsheet, replacing it with real-time reports that will streamline the process of accounts reconciliation.
Using Peakflo, facilitate customers who’d like to settle prepayments. They can pay through a self-serve payment portal that instantly connects them to a payment getaway. Customers can also upload any documents to prove prepayments.
In a partial payment, a client pays less than the full amount listed in the invoice, usually 50% of it. This type of payment term is commonly used in construction business, as the vendor needs starting capital to cover the project’s expenses.
With Peakflo, create a workflow that enables partial payments, and assign the relevant customers.
When accessing the payer portal, these customers will have the option to make partial payments. This feature will especially come in handy when you’re working with clients or vendors with large transactions as they can pay in parts.
An installment agreement is a contract that allows a buyer to make partial payments over time. It’s usually used to acquire large assets, such as shopping centers, warehouses, and corporations.
Installment agreements are also present in the manufacturing industry. For instance, a textile company might ask for a 30% down payment, 40% after production, and 30% completion after delivery.
This is also possible with Peakflo. In the workflow, send automated or manual reminders for each phase of the installment before or after the due date and repeat the follow-up if needed.
Plus, you’ll have the flexibility to tailor the message so that customers know how much they need to pay and when.
Line of Credit
Line of credit (LOC) is the maximum amount of money a buyer can lend from a vendor. The advantage of this payment term is that the borrower has control over the repayment amounts, as long as it doesn’t exceed the limit.
Let’s say you set the credit limit to $5,000 and the customer makes a purchase worth of $4,000. Using the LOC term, the client can decide to repay the full balance next month or pay $1,000 in 4 installments.
When creating a new workflow, you can set the credit limit for customers in terms of amount and days. This will be helpful to plan a follow-up strategy to prevent breaches of the credit limits.
To track the payment status of customers with credit limits, simply head to Credit Control Report. When a client misses the due date, we will send a notification to your assigned team member to freeze the account.
Peakflo further streamlines LOC payment as you can apply credit notes to invoices in just a few clicks. This will give you better documentation of the changes happening to the invoice, plus better transparency on the customers’ credit amount and how much remains.
Like the name suggests, an immediate payment happens when a buyer completes the payment as soon as the invoice is issued.
The common example of this term is when you buy something in an eCommerce store like Amazon or a brick-and-mortar retail shop.
In Peakflo, record immediate payments seamlessly with details such as received date and payment method from cash to transfer, then link it to the right invoice. Immediately, the invoice will be marked as paid.
Net 7, 10, 15, 30, 60, or 90
In this payment term, the number following “NET” refers to the days in which the payment needs to be made in full.
Another advantage of using our software is the flexibility it offers. Users can easily make the most of the workflow by deciding the number of days in which a payment is due.
The most ideal option would be Net 30, usually for dealing with recurring payment collections. If your customer agrees to use the Net 30 term, simply create a new workflow and set the maximum credit limit in days to 30, or longer if necessary.
If your invoice date is January 1, that means the client has to settle the payment before January 30. Make sure to configure follow-up actions, from reminding on WhatsApp or Email to sending a letter of demand. If the customer fails to meet the deadline, our system will automatically freeze their account.
A recurring payment is a model where customers pay a business based on a regular schedule – the funds will be automatically deducted from the client’s bank account.
This practice is often found in subscription-based businesses, such as video streaming services, gyms, and magazines.
With Peakflo, you can improve accounts receivable process by creating a personalized workflow for recurring payments, customizing the message templates for faster communication, sending reminders via WhatsApp, SMS, or email, and adding an escalation matrix to suspend the account if the customer doesn’t pay.
Common Challenges with Payment Terms and Solutions for Your Business
In this section, we’ll discuss several challenges businesses face when dealing with payment terms and how to solve them.
In today’s digital savvy world, hackers always find new ways to steal sensitive information, especially bank account and credit card details.
Thankfully, security is always our top priority. Peakflo follows the best industry practices to ensure a safe environment for our users. Those include using Google Cloud Platform and Google’s proprietary database to host our services and data.
What’s more, we use the 256-bit Advanced Encryption Standard to protect your data against man-in-the-middle attacks.
Sometimes, late payments are not the customers’ fault, but rather your internal team’s inability to optimize the collection procedure. This often happens due to the lack of a centralized workspace, resulting in siloed communications.
To boost team collaboration, Peakflo can serve as your source of truth for all internal communications. Our timeline feature helps accountants have a better internal coordination by mentioning a team member to align on some tasks.
Have a full access of the customer’s invoice status and the courses of actions you’ve taken through the audit trail. Here, you can also trigger one-click follow-up for ad-hoc communications and promise-to-pay tasks.
Apart from team collaboration, we also have a dispute management portal that saves your time when dealing with customer conflicts.
While it’s not impossible, converting late into timely payers is extremely difficult. Fortunately, Peakflo helps you to stay on top of your customers’ payments, especially the late ones.
Take advantage of the workflow for late payers and trigger manual or automatic follow-up actions such as multi-channel reminders and escalation matrix from office visit to legal escalation.
Stay on top of pending invoices with the Invoice Status Tracking Report so you can quickly make actionable decisions on the next steps to take.
Additionally, track customers’ payment behavior complete with AI predictions through the Customer Status Tracking Report to further personalize your workflow.
Limited Payment Options
Some accounting tools offer limited payment options, which can result in your business losing valuable customers.
With Peakflo, you don’t have to worry about that. Our features ensure that you can:
- Facilitate any types of payments such as card, bank, and eWallet.
- Use static or dynamic virtual accounts to process payments faster.
Want to Get Paid 2x Faster? Pick the Right Payment Terms and the Right Software
Still not sold on the idea of using automation software? Give our savings calculator a try and see how much money you can save with Peakflo!
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