How to identify payment terms for customers

Jenny EsauJenny Esau, Managing Director of Credit Management Group UK 

If your business offers credit to customers then you should have payment terms to ensure that credit is paid to you within an appropriate time frame suitable for your business’ cash flow. You may have certain payment terms that you use more often than not (i.e. 30 days from date of invoice), however before offering your prospective customer payment terms you should check that they are suitable for both your business and the risk your customer may pose to your business. 
Identifying payment terms for customers 

Due diligence

Carrying out due diligence prior to agreeing a contract with your customer is essential to understanding what payment terms they should be on. Credit checking is a great way of finding their financial standing; a bad credit score may result in your re-thinking bringing them on as a customer, or simply giving them shorter payment terms to reduce your risk. 

Cash flow for your business

You must also take into consideration how your cash flow will be affected by providing particular payment terms; you certainly don’t want to make the wrong decision and have your cash flow suffer as a result. Different industries will have particular industry standards that you can base your payment terms on, but don’t be afraid to deviate from these if others would be more suited for your business. 

Terms and conditions 

Once decided upon appropriate payment terms for your customer, they need to then be incorporated into your terms and conditions and subsequently made known to your customer for acceptance. Ensure you have proof of this acceptance as it can be used a leverage should you find yourself with an issue of late or non-payment. 

Negotiations with your customer

Customers may not always want to accept the offered payment terms; so you should be prepared to negotiate with them. Having valid reasons why you have concluded on said payment terms will often be enough to pacify your customer into accepting them, using reasons such as: their poor credit limit, overheads you have to account for, industry norms, amongst many others. If you suspect your customer will want to barter with their payment terms before you have even presented them, go in with your ideal offer (if not better), and that way you leave yourself some room to barter for slightly longer terms so that your customer is satisfied with their deal and you have not agreed to something that will adversely affect cash flow. 

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