Shorten Your Payment Terms to Have Cash Come in More Quickly 

Cash flow is the heartbeat of your business and making sure you get paid on time is one of the best ways to prevent future financial troubles. There are loads of tactics you can employ and in a previous post we listed 12 of the best ways to get your customers to pay you on time. In our experience we've found that having stricter and shorter payment terms has proven to be one of the most effective.

Payment terms are basically the guidelines you give to your customers. They tell them the different modes of payments you accept (credit cards, debit cards, or direct debit), the incentives you offer and penalties you charge for on-time and late payments, and of course, the date you expect to receive said payments. In other words, the deadline.

Businesses in the food and beverage industry use different payment terms and below are the most common. 

• NET 7 - Your customers should pay within 7 days after they receive the invoice
• NET 15 - Your customers should pay within 15 days after they receive the invoice
• NET 30 - Your customers should pay within 30 days after they receive the invoice
• NET 60 - Your customers should pay within 60 days after they receive the invoice
• NET 90 - Your customers should pay within 90 days after they receive the invoice

30 days or NET 30 is the standard term that most suppliers choose to extend to their customers. And although this is the most common it doesn’t mean it will work well for all types of businesses.

Of course, offering longer payment terms can be a strategic move as it provides more flexibility and convenience which can help you win more customers and attract new businesses. However, bear in mind that it can affect your cash flow situation and your ability to stay in business.

In fact, setting generous payment terms like NET 30, 60, and 90 can delay the money you expect to come into your business and will eventually leave you running out of cash.

Also don't forget that often customers don't pay immediately after receiving their invoice, so your 30-day term could be stretched to 45 days or even longer. This is a big business no-no because just like your customers, you've also got bills to pay, inventory to replenish, and a cash flow to look after.

SHORTER PAYMENT TERMS CAN HELP YOU GET PAID FASTER

Do your customers pay you on time? Do your payment deadlines allow you to get the cash you need to pay for your outgoings?

If you answered ‘no’ to both of these then it's high time you shorten your payment terms to speed up the time it takes for money come in. When you reduce the number of days a customer can settle their invoice, you will receive payment faster and on time. Remember, the quicker you get paid, the better your cash flow.

Having a shorter payment term also means you’ll always have reserved cash to pay for the things you need to run your business. We recommend offering a 7-day term that way you'll be able to cover your monthly expenses because you'll know that you'll receive money within 30 days regardless late paying customers.

In fact shorter payment terms are beginning to be more common nowadays.  A study from Xero said 30-day terms are now out of date and most small businesses already choose to offer shorter time periods. Their study revealed:

• 70-80 % of businesses offer payment terms that are two weeks or less
• Over half of these businesses request payment within 7 days

You might be worried that shorter payment terms could be a turn-off for some customers but there are several ways to make stricter and shorter payment deadlines fair for them:

1. Discuss your payment terms clearly

Before you begin fulfilling your customers’ orders, be sure you discuss the payment terms with them. Even better, put your terms in writing - include how you want to get paid and when. This way, there will be less confusion and miscommunication as you have already set the expectations around payment. It’s also advisable to always include your due date in all your invoices as it will act as a reminder to your customers.

2. Provide multiple payment methods

Your customers have businesses to look after, too. So if you’re going to implement stricter and shorter net days, ensure you also make payment easy and hassle-free for them. Start accepting Cash on Delivery (C.O.D), mobile and online payments, and payments through all major credit and debit cards. By doing this, you can guarantee that you will get paid on time or even earlier.

3. Accept direct debit payments

Accepting direct debit payments is another way you can make payments convenient for your customers. This method lets you charge them automatically, on a regular schedule, so whether you use a short payment term or not, you can be sure that money will keep coming into your business.

It’s common for small- to medium-sized business owners to face difficulties when managing cash flow. So we suggest you constantly look at your cash flow needs and determine which payment terms will work best for both your business and your customers. You might find that longer payment terms are ok and can be used as a reward for those customers who consistently pay on time. But for slow-paying or new customers you could consider shorter terms.

As an App especially built for the food and beverage industry, Ordermentum is an exellent one-stop solution to help you shorten your payment terms. Not only does it mean you can offer your customers easy instant payment options via credit card or direct debit but you can also set up flexible, customised payment terms for each of your customers. What's more you will be able to generate invoices instantly, easily resend invoices and create a seamless ordering system for your customers.  

Late payments don't have to just be an accepted part of doing business nor do they have to cost you time and money. By making simple changes to your terms and the types of payment options you accept you can easily get on top of your cashflow and keep your customers happy!

You'll find more cash flow advice like this when you visit our blog.