The Best Payment Terms for Faster Cash Flow
A great way to speed up your cash flow is to get paid faster by customers who owe you money. One way to do that is to examine your payment terms to see if you can accelerate them. First let’s talk about what payment terms are common. Then I’ll share a study that showed which payment terms generate the fastest payments.
Traditional payment terms are spoken in the following format:
Percentage discount/(Days due from invoice date), “Net” (Days due before payment is past due)
An example is 2/10, Net 30. It means to the customer that if they pay within ten days, they can take two percent off of the invoice due amount. If they don’t want to do that, they need to pay the full invoice within 30 days of the invoice date.
You could write “2/10, Net 30” on your invoice, but you will get paid faster if you write it out in plain English.
If your industry “has always done it that way,” I encourage you to challenge the status quo. Getting your cash faster is important to all small businesses, so don’t let your industry hold you back.
Most corporations are required to take discounts if they are offered, so offering an early pay discount might help you get paid faster.
There are several studies on how to get paid the fastest. Of course they all have different conclusions! FreshBooks advises that “due upon receipt” terms can work against you as most people decide that that can mean anything. They suggest using wording that says “Please pay this invoice within 21 days of receiving it.” Here is their blog post on the topic:
Xero produced a page on the topic as well. Their research suggests that debtors pay bills 2 weeks late on average. They also suggest using terms of net 13 or less in order to get paid within 30 days. Here is their page on the topic:
Feel free to contact us if you’d like help deciding on payment terms for your business.