Payment Terms: The Ultimate Guide to Boost Cash Flow (2024)

Payment terms are essential in any business transaction as they define the cash flow cycle. They are the rules that ensure vendors and suppliers get paid on time and customers know when to expect payments. When discussing payment terms, we refer to the conditions that dictate when and how payments should be made.Payment terms define when you get paid—at least regarding accounts receivable (AR). For accounts payable, payment terms usually refer to paying vendors and suppliers.

But regardless of who is paying who, the terminology is the same. The most significant difference is strategy.

Setting your payment terms means you set the cash life cycle. Of course, customers don't always abide by your words — but failing to have them can result in chaos.

Payment terms usually appear in two places: In the initial contract and every invoice. A payment term highlights when an invoice needs to be paid, how often, and if there are penalties for late payments.

When printed on an invoice, include the following:

Payments have a unique vocabulary.

You probably know the "net term." This is the period for accepting payments. If you have a Net-7 payment period, your customers should send the money within seven days of receiving the invoice.

There are several options: Net-7, 10, 15, 30, 60, or 90. Net-30 is the norm for most B2B businesses, but depending on your industry, it could be shorter or longer. In some cases, you may request immediate payment. This is common when taking advanced payments or a one-time project. However, you can use a much longer list of abbreviations on your invoices.

If slow cash flow is a constant issue in your accounts receivable department, you must have heard the most common late payment excuses by now. One method of reducing this is to highlight a late payment fee. Organizations with a high percentage of high-risk transactions would likely want to use this to deter intentional delays.

The average late fee ranges between 1% and 1.5%. While it may seem low, it does incentivize customers to pay on time and is low enough to avoid allegations of usury.

When implementing a late fee, it's best practice to:

Let's assume you have your payment terms in place, and all clients have agreed to them via a signed contract. You've decided to stick with the Net-30. What does this look like in real time?

According to Deloitte, payment takes about 30 days, and 47% of suppliers are paid late. While payment terms can help streamline the process, they are the prologue, not the last chapter.

Late fees can help. But you'll also want a sound collections strategy to improve cash flow. There are three ways to do this:

Offering as many payment options as possible is ideal. Choice makes it convenient for customers and also makes it harder to say "no" when you're selling to prospects.

But there's also a hierarchy here. For example, you may prefer ACH and bank-to-bank transfers and offer credit card payments for convenience. With the right payment platform, you can turn the credit card processing fee into a convenience fee to encourage customers to choose more affordable options and cut costs.Likewise, you can offer "zero-fee" payment options to promote your preferred method.

You need a range of options to incentivize and discourage payments. For example, if you only accept credit cards and charge a convenience fee, the added cost could create friction in the long term. However, giving customers a second or third option makes it seem more reasonable.

The goal is to have customers pay on time or earlier than the due date. You can offer small discounts, such as 2% or 5% for early payments. For example, consider having a Net 30 but offering a 5% discount for clients who pay within seven days.

And this logic applies to preferred payment methods, too. You may give clients who pay with ACH a 2% discount over those who pay with a check or credit card.

It's also possible to extend your customers a line of credit, mainly if you've worked with them long. A customer credit line allows them to settle bills over time, usually monthly or quarterly.

While this does decrease your cash flow, it can be a way to keep larger clients. Since there is a higher degree of risk, it's better to be selective using this strategy.

The biggest challenge is ensuring that your accounting software or ERP can handle customized invoicing. The last thing you want is to change the default payment term for each invoice and manually review monthly credit payments.

The more detailed the payment terms and the more customized your payment strategy, the larger the margin for error becomes when performing AR tasks by hand. If you plan to streamline your standard payment terms for a better customer experience and faster payments, it's best to automate the AR process.

Adding payment details to an invoice is often shown at the top.

In a web portal for online payments, the payment terms show at the top, as in a traditional invoice, after the payment options, or as part of a separate "terms and conditions" page.

Advanced payments offset potential non-payment and are used when working with a new customer. These payments are made before a service or product is delivered, and businesses benefit from the immediate cash flow.

If you plan to request an advanced payment, you can ask for 25%, 50%, 75%, or 100% of the payment upfront. This depends on your reason for requesting an advance and may be negotiated. For example, you may only need 25% of an advance to order the initial supplies required to complete an order.

When designing an advance payment option, it's essential to lay out critical information:

When paying is easy for your customers, you'll get paid faster. But reducing friction doesn't have to be a complicated process. The cornerstone of being user-friendly is being clear. First, write them in plain English in your contracts and invoices.

But there's more you can do.

Self-service payment portals, accepting multiple payment methods, secure payment method storage, automated collections, and verified receipts are all customer-centric initiatives that keep your books organized. Paystand is a solution that integrates with your ERP or accounting software. It lets you sync your invoice data in real time and streamline your AR process.You can spend more time on what matters—forecasting, strategizing, and following up with new or high-risk payments—without worrying as much about cash flow.

At Paystand, we offer all these features and more. Book a demo today to find out if we're a good fit for you and your team.