When invoicing, it’s often appropriate to have payment terms that let the client or customer know when to pay. These are usually “net” terms which translate to the number of days until payment is due, from the end of the month. However, cash on delivery or due on receipt requires instant payment. How do these unique terms affect the business?
When are instant payment terms applicable
Before using instant payment terms, run them through this test. If it passes each one, using them should pose no issue.
Does it fit the business?
- Does an instant payment model not fit your business?
- Are there procedures such as checking after or any downtime?
- Do you provide the service or items to large-scale businesses?
If the answer to any of these questions is “Yes”, you may need to reconsider using instant payment methods.
What is the invoice total?
Sometimes, the total cost of an invoice can be what makes instant payment terms unreasonable. If the cost of a service or item is far too high, you cannot ask for instant payment. In contrast, something low-priced is likely viable for instant payment. Though it varies greatly between services or goods, a price under £200 is generally reasonable.
Do you use recurring invoices?
In the case that you use recurring invoices, you should heavily consider asking for instant payment or shorter terms. You want to avoid invoicing a second time without receiving payment for the first. Be wary of longer terms, as net terms may suffice. For example: if you invoice at the end of each month, anything up until net30 works perfectly.
Is it reasonable?
You need to determine whether or not it’s reasonable to ask the client to pay immediately. This can be difficult to determine and is best answered last as the final factor.
The effects of using it
Asking for instant payments can have a negative effect on business relationships. This can seem like a way of billing someone that you don’t trust. Unless this is the case, try to be as transparent and reassuring as possible. This will preserve a healthy working relationship.
Business cash flow doesn’t actually increase as you aren’t making more money, you’re simply getting it quicker. The only difference is that you would be using the accounts receivable process less often.