Protect yourself and establish payment terms.
How Terms Work
Set up the payment terms right, and you will help your business grow just a little faster than you could otherwise. Terms tell clients and customers by when payments to you are due. They can be as little as 14 days from invoicing or up to months later.
If payment terms are “Net 14”, that means that your client has to pay you in full within two week. Similarly, Net 30 means that they have 30 days, and so on.
Clients may set the payment terms if you don’t, and then you may be stuck with unfavorable schedules. Some can push payment delivery as far as Net 90! That is more like a loan, and one that’s interest free.
You also want to set an expectation for the start of the timeframe, either from day of completion of services or from receipt of your invoice. For example, you might set terms at “Net 14 from date on invoice” or “Net 14 from delivery date of goods.”
It’s important to balance your terms against any applied to you as a customer. Somteimes, it can get tricky when payments cross. Let’s say you have Net 60 terms with your customer and Net 30 with your supplier. That means that you have to pay for your raw materials 30 days before your customer pays you for the goods you made. Add this to your internal lead time, and you could be out that money for months.
The Effects Of Payment Terms
Payment terms can have a huge impact on the success of your business. Those that pay well will expect terms, and those that don’t respect payments will be held accountable. Without terms, you leave yourself open to risk.
Also, while the balance sheet will work out the numbers to show the flow of money, it’s your job to remember, Cash is King in the business world. If you have long payment terms from your customers and short ones from your suppliers, your balance sheet may look fine, but your cash flow will suffer.
Your goal should be to negotiate payment terms that work best for you. As a new business, you may not have tons of leverage, but it never hurts to ask for what you want. Counter unfavorable terms and best yet, establish your own upfront as a condition of working with you.