How to set payment terms and getting paid faster if you’re a small business
Following up on late or non-paying customers is no small business owner’s favorite task. Which is precisely why you need to set payment terms up front – and in writing – before you work with a new client or customer.
By communicating and agreeing on the non-negotiables for doing business with you, you’ll avoid awkward misunderstandings, frustrating disputes, and in most cases, the ugly hassle of debt collection.
These tips will help you pave the way for consistent cash flow by setting clear payment terms.
Minimum legal requirements
As a business owner you are required to include:
- Your business name
- Your ABN
- The date
- Your address
- A description of the goods or services
- Whether there is GST on your invoices.
For more information on invoice requirements see the ATO website.
However, it is in your best interest to include information on how and when customers can make payment. The more ways you give your customers to pay you and the easier you make it, the less time you’ll spend chasing the payment. It’s recommended that every invoice also include:
- Trading terms
- Payment instructions for how payment can be made
- Whether the payment can be made online through a payment service
- Terms and conditions for early or late payments
If you haven’t shared your payment terms in writing and a client won’t pay, you have little recourse. You won’t be able to charge a late payer interest on their balance owing, let alone engage the services of a debt collection agency.
In addition to including your payment terms in clear and simple language on every invoice, be sure to state your payment terms early on.
Send along your policies in an email, include them in an agreement or contract, and/or point new clients to the terms and conditions outlined on your website.
What to include in your payment terms
It’s up to every business to decide when and how much they need to be paid in order to achieve a smooth and positive cash flow.
As a starting point when setting payment terms, think of the troubles you’d like to avoid and how you could prevent them with the right policies.
In addition to when payment is due (i.e. on receipt of invoice, payment 14 days after invoice, payment 30 days after invoice) you might want to include:
- Pre-payment requirements (i.e. a full or partial deposit)
- Incentives for early payment (e.g. clients get a discount on invoices paid early)
- Late payment fees (e.g. clients are charged a late payment fee or interest on the balance, accruing monthly)
You might also include a description of the products or services offered, delivery timelines, a reminder of the terms of your agreement, and what will happen if either party doesn’t stick to the policies in place.
For small businesses, requiring pre-payment in the form of a full or partial deposit can really help avoid the “feast or famine” cash flow cycle. Another method is to require regular or milestone payments throughout the delivery of the contract.
It can feel a bit intimidating to ask for payment before you’ve completed the work – but think of it as a client screening process. After all, it’s only the ones who understand you are offering a valuable service and are willing to pay for it that you want to work with.