When you supply goods or services to other businesses, you’ll usually extend them some form of credit. Setting the right credit terms is essential if you are to protect your business from the risk of late payment.
All too often, we hear of small businesses getting into difficulty because a client has taken too long to pay. To avoid this SMEs need to protect themselves and lay down some ground rules before embarking on a new business relationship, says Adam Home of Safe Collections.
At the very least you need a contract or terms and conditions that clearly state your payment terms. Make sure this is signed before any work is agreed or goods are ordered. Don’t just assume that clients will read your contract or T&Cs; getting a signature (on paper, or digitally) is the best way to prove you’re on the same page.
Here’s the absolute minimum your terms should cover.
Specify a Payment Method
When taking payments, you need a method that is convenient and affordable for both parties. Most businesses accept bank transfer, and the majority of clients both domestic and international can send money this way.
You could also opt to accept electronic payments via credit and debit card. Your business will shoulder the cost, but credit and debit card acceptance may facilitate speedy payment.
Take a Deposit
It’s always wise to take a deposit if you can. It reduces your risk, ensures that your client is committed, and is a useful aid to your cash flow. The amount you ask for will vary according to the nature of the work or goods to be purchased, but we recommend that you ask for at least 25%.
You may also want to stipulate milestone payments at key stages of delivery. Again, this can help to mitigate your financial risk and ensure you aren’t working without payment for too long. If payment doesn’t materialise, you have the option to pause work or delay delivery while the client brings their account up to date.
Set a Payment Deadline
You are entitled to ask for payment on receipt of invoice, but most businesses will expect to see some kind of credit extended to them. 30 days is the norm, but you can vary this at your discretion. It may be wise to have a shorter deadline for new clients, or for a client who has paid late in the past.
Some larger companies will try to impose their own purchase terms on you, and it’s up to you how much you want to rock the boat in this situation. Some will insist that you comply if you want their custom, but you should decide what is right for your business and our advice is to never be bullied in to accepting unfavourable payment terms.
Limit Your Risk With Credit Limits
This is perhaps the most important part of setting credit terms. A wise company will use credit scoring to assess a client’s credit worthiness and set a reasonable credit limit at the start of any new relationship. Do use your own judgement, in conjunction with the information with the credit report.
Carefully review the proposed credit limit against the client’s credit report, and be especially mindful of extending credit to newly incorporated companies or those with low or zero credit scores.
Don’t Be Afraid to Assert Yourself
Whenever you sell goods or services on credit, you are investing in the future success and solvency of your client, so be prepared to assert yourself.
If a client refuses to sign your terms, or won’t pay a deposit upfront, this should be a warning sign. If a client balks at staged payments or tries to bully you in to providing more credit than you are comfortable with then that may also be a sign that they already know they can’t or won’t pay your invoice. That being the case small business owners would do well to carefully consider the risks and rewards involved, as sometimes the easiest way to avoid a bad debt is to simply never provide credit in the first place.