Hemorrhaging cash? Investigate your payment terms

Late payments and payment terms

Are your invoices, and when you need to get paid, clearly spelled out to your client base? Having easy-to-understand payment terms is a big step in ensuring that your business gets paid on time, and in a way that suits you and your customers.


Consistent late payments are a big concern for small and medium-sized businesses, since many companies are negatively impacted — including being unable to pay staff or vendors. Still, there are business owners who are reluctant to chase late payments — perhaps for fear of souring their business relationships, not having a defined accounting process or because the terms haven’t been properly set. Fortunately, you can take action and establish the right foundation to receive prompt payments.

Payment terms, and the invoice itself, are the first step in getting paid the right amount, at the right time. They represent an agreement between you and your customer, laying out your promise to deliver a specific good or service, and your customer’s promise to pay you a specific amount, by a stated time. 

Payment term definitions

Having clear payment terms will help you to maintain good cash flow while keeping your customers happy. But what different types of payment terms are there? And which ones are right for your business?

 

Cash on delivery, Immediate and Payable on receipt 

These are different terms for saying that payment is due when the invoice is received. Some businesses that deliver goods request payment the moment those goods are delivered (with payment usually taken by the delivery driver). 

For companies that provide services, they may also include the term that their service cannot be used until payment is received (for example, a marketing or design company could stipulate that their work cannot be printed, posted or otherwise published until they’re paid).

Cash before shipment 

This is often used by companies that provide unique goods or services, such as a custom-made piece that would only have value to that specific customer. Typically, this down payment has to be received before any work begins. It acts either as a kind of insurance in case the customer doesn’t pay, or as a way of paying for upfront materials or other out-of-pocket costs. 

The amount is often a substantial percentage of the total owing. The business relationship between the company and the customer would determine exactly how much cash before shipment is required. This is similar to the term Payment in advance

Cash in advance or Cash with order 

These are similar to cash before shipment, except that in both cases, full payment must be received before work begins on the order.

End of month 

This means that payment is due on the last day of the month in which the invoice is issued. 

Cash next delivery 

This term means that payment must be received before the next order is delivered. This payment term is mostly used by companies with customers that place regular orders. 

Line of credit pay or Service on credit 

You would use this term to allow customers to pay outstanding amounts all at once, within a specific period. 

Month following invoice 

Saying ‘month following invoice’ plus a net number indicates that payment is due a specific number of days after the invoice is received. For example, “Month following invoice net 30” means payment would need to be received within 30 days of receipt. 

A percentage net formula 

This provides an incentive for early payment of the invoice. For example, “5% net 14” means that the customer would receive a 5% discount for paying within two weeks. Keep in mind that you could also use invoice factoring as a way to get cash upfront for your unpaid invoices, rather than offering a steep discount to customers just for paying early.

Terms of sale 

Your terms lay out the contents of the order agreement and typically include what will be delivered, the date of delivery, the full amount to be paid, the date payment is due, the ways of paying the amount owing and any possible late-payment penalties. 

Interest invoice 

An interest invoice is used for late payment penalties, which are usually a percentage of the overdue amount. The exact amount of the late penalty fee should appear on the terms of sale. 

 

To find out more about Blacksail’s alternative lending including invoice factoring solution, and how it could help eliminate late-payment problems, please call us at 1-866-272-3704 or contact us here today

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