Payment Terms

Payment terms refer to if you require customers to pay at the moment they interact with you (e.g., make a purchase or sign a contract) or are given a period of time to pay. This is sometimes also called “extending credit.” You should set standard payment terms that appear on all invoices and are reflected in all contracts. Before starting on any work for a client, both you and the client should agree on payment terms. Here are some common payment terms:

• Extending Credit – Offering Payment Terms. In most cases there’s no need to extend credit to consumers unless you deliver a service that is delivered over time. However, in the case of business-to-business sales, commercial clients will want some type of credit that lets them pay over time.
  • Payment Time. It is common to allow payment 30 days after you bill or invoice them. Larger companies will try to push this out to 60, 90 or sometimes 120 days after delivery of the product or completion of the service for large companies. Obviously the longer you give them to pay, the longer you don’t have that cash. Ideally, you want to be paid as quickly as possible, but 30 days is standard.
  • Do a Credit Check. If you are extending credit, conduct a credit check first, especially when large sums of money are at stake. There are three major credit-reporting agencies serving the United States and Canada: TransUnion, Equifax and Experian.
  • Use Date of Invoice and Not Date of Receipt. Payment terms are measured from a “date”. That date is typically either the date on the invoice, the date you send the invoice or the date your customer receives the invoice. Your policy should be based on the date of the invoice (which is the earliest of those three options). That being said, try to use an electronic delivery of invoices discussed below) so that the date of the invoice is essentially the same as the date it is received.

• Upfront Payments. Whenever possible, receive payments in advance for work to be performed.
• Secure Deposits. If you cannot receive upfront payment, you may be able to secure a deposit in advance of providing your product or service that is applied to any outstanding balance. Try to get a deposit of at least one third of the total cost of the product or service. For example, if you were building a house or delivering custom software, you would not want to start working until you received some payment.
• Progress Payments. Progress payments are also a way to ensure that you do not leave yourself open to financial risk. You receive payments at various stages of the project (e.g., 25 percent on contract signing, 25 percent upon delivery of a milestone, 25 percent upon substantial completion, and the balance at completion).
• Set Up Early Payment Incentives & Late Payment Penalties. Incent your customers to pay their invoice on agreed upon terms by offering a 10% discount on the invoice. If your incentive policy isn’t working out as planned, you can also implement a late payment fee as a deterrent for your customer.

Outline each of these payment terms and make sure they are incorporated into your legal agreements.