payment terms

Mastering Payment Terms: Strategies for Encouraging Purchases and Maintaining Cash Flow

Kurt GraverMarketing & Sales

For UK entrepreneurs, navigating the complexities of payment terms can be daunting. On one hand, offering flexible payment options can be a powerful tool for attracting customers and encouraging purchases. On the other hand, extending credit or allowing delayed payments can strain your business’s cash flow, making it difficult to cover expenses and invest in growth.

In this blog post, we’ll explore the intricacies of payment terms and provide practical strategies for striking the right balance between customer attraction and financial stability. Whether you’re a startup founder or an established business owner, mastering payment terms is essential for long-term success in today’s competitive market.

The Importance of Payment Terms


Payment terms are the conditions under which a business allows its customers to pay for goods or services. These terms include the payment method (e.g., cash, credit card, bank transfer), payment schedule (e.g., upfront, net 30, instalment plans), and any discounts or penalties for early or late payment.

Getting your payment terms right is crucial for several reasons:

Cash Flow Management: Payment terms directly impact your business’s cash flow, which is the lifeblood of any organisation. According to a study by the Federation of Small Businesses (FSB), late payments cause 50,000 small businesses to close each year in the UK, with an average payment delay of 23 days (Source: FSB).

Customer Attraction: Offering flexible payment terms can be a powerful differentiator in a crowded market. By giving customers more options and making purchasing your products or services easier, you can attract new business and build loyalty among existing clients.

Competitive Advantage: In some industries, extended payment terms are the norm, and failing to offer them can put you at a disadvantage compared to your competitors. For example, in the construction industry, it’s common for suppliers to offer trade credit terms of 30, 60, or even 90 days to help contractors manage their cash flow (Source: Construction News).

Risk Management: While extending credit can be a useful sales tool, it exposes your business to non-payment or late payment risks. Carefully crafting your payment terms can help you mitigate this risk by setting clear expectations, incentivizing timely payment, and protecting your interests in case of default.

Common Payment Terms and Their Pros and Cons:


Before we discuss strategies for optimizing your payment terms, let’s examine some of the most common options and their advantages and disadvantages.

Upfront Payment: Requiring full payment before delivering goods or services is the most secure option for businesses, as it eliminates non-payment risk. However, it can be a barrier for some customers and may limit your sales potential.

Net 30 (or Net 60/90): This is a common trade credit term where the customer has 30 days (or 60/90 days) to pay the invoice in full. Offering net terms can be a good way to attract larger clients or compete in industries where trade credit is the norm. However, it does tie up your cash flow and expose you to the risk of late payment or default.

2/10 Net 30: This is a variation of net terms, where the customer receives a 2% discount if they pay the invoice within 10 days or the full amount is due within 30 days. This can incentivize early payment and improve your cash flow, but it does come at the cost of the discount.

Instalment Plans: Allowing customers to pay in instalments can make larger purchases more manageable and attract a wider range of buyers. However, it does extend the time to receive full payment and may require additional administration to manage the instalment schedule.

Milestone Payments: For project-based work or large orders, milestone payments can be a good way to balance your cash flow needs with the customer’s desire to pay over time. By tying payments to specific project milestones or delivery dates, you can ensure a steady stream of income while still offering flexibility to the customer.

Recurring/Subscription Payments: If you offer a service or product that customers purchase regularly (e.g., monthly or annually), setting up a subscription payment model can provide a predictable and stable source of cash flow. However, it relies on customers continuing to see value in your offering and not cancelling their subscription.

Strategies for Optimizing Your Payment Terms


Now that we’ve covered the basics of payment terms let’s explore some practical strategies for optimizing your approach to encouraging purchases and maintaining healthy cash flow.

Know Your Industry Norms: Payment terms can vary widely by industry, so it’s essential to understand what’s typical in your sector. Conduct market research, talk to industry peers, and consult with trade associations to understand what your competitors offer and what customers expect.

Segment Your Customers: Not all customers are created equal, and it may make sense to offer different payment terms to different segments based on factors such as their size, creditworthiness, or purchase history. For example, you may offer more generous terms to long-standing clients with a track record of timely payment while requiring upfront payment from new or high-risk customers.

Be Clear and Transparent: Whatever payment terms you offer, communicate them to customers upfront. Include your terms on quotes, invoices, and contracts and explain any discounts, penalties, or interest charges that may apply. Being transparent helps avoid misunderstandings and disputes down the line.

Incentivize Early Payment: Offering discounts for early payment can effectively encourage customers to pay promptly and improve your cash flow. According to a study by Atradius, businesses that offer early payment discounts have 37% fewer late payments than those that don’t (Source: Atradius).

Use Technology to Streamline Processes: Implementing digital invoicing and payment systems can make it easier for customers to pay you promptly and reduce the administrative burden on your team. Tools like GoCardless, Xero, and QuickBooks can automate invoice reminders, reconcile payments, and provide real-time visibility into your cash flow.

Monitor Your Accounts Receivable: Regularly review your accounts receivable to identify any overdue invoices or customers who are consistently late with payments. The sooner you follow up on late payments, the more likely you will collect what you’re owed. Consider setting up a process for escalating overdue invoices, such as sending reminder emails or making phone calls at set intervals.

Offer Payment Plans for Large Purchases: If you sell high-value products or services, offering payment plans can make them more accessible to a wider range of customers. You can encourage purchases while maintaining a steady cash flow by breaking costs into smaller, more manageable instalments. Just be sure to communicate the payment plan terms and have a process to manage the installment schedule.

Consider Invoice Financing: Invoice financing can be useful if you’re struggling with cash flow due to long payment terms or late payments. With invoice financing, you can sell your outstanding invoices to a third-party provider, who will give you an upfront payment (typically 80-90% of the invoice value) and then collect payment from your customer. While a fee is involved, it can be a good way to access working capital and smooth out your cash flow.

Review and Adjust Regularly: Your payment terms should not be a set-it-and-forget-it proposition. Review your terms to see how they impact your cash flow and customer relationships. If you’re experiencing a high volume of late payments or customer complaints, it may be time to adjust your terms or communicate them more clearly. Similarly, if you consistently receive payments early, you may have room to extend your terms or offer more flexible options.

Conclusion


Mastering payment terms is a critical skill for UK entrepreneurs looking to encourage purchases, maintain healthy cash flow, and drive long-term business success. By understanding the common payment terms available, segmenting your customers, incentivizing early payment, and regularly reviewing and adjusting your approach, you can find the right balance for your business.

Remember, there is no one-size-fits-all solution when it comes to payment terms. The key is to be strategic, transparent, and adaptable, always keeping your cash flow needs and customer relationships at the forefront of your decision-making.

If you’re struggling to optimize your payment terms or manage your cash flow, consider seeking the guidance of a financial professional or business mentor. Organizations like the Federation of Small Businesses, the British Chambers of Commerce, and local enterprise partnerships can also provide valuable resources and support.

Taking a proactive and thoughtful approach to payment terms can position your business for success and build strong, lasting relationships with your customers. So start putting these strategies into practice today, and take control of your cash flow and financial future.