How to get clients to work with your invoicing payment terms
Unpaid invoices and late payments is a consistent concern for Australian business owners.
Outstanding invoices negatively impact your bottom line and your cash flow. While you wait for payment, it can make it harder to cover bills, wages and other expenses.
It is critical to minimise outstanding invoices and get customers to work with your payment terms. For every day an invoice goes unpaid, you are effectively loaning money to your customers. But you are not a bank, and loaning money is not your role.
So, how do you get your clients to work with your payment terms?
Here are four items to work through.
1. Decide on your payment terms
Before you can get customers to work with your payment terms, you first need to decide what you want your payment terms to be.
Do you expect your customers to make a partial payment prior to receiving your product or service?
Do you want to offer your customers 7, 14, or 30 day payment terms after the invoice date?
Or do you want your customers’ payment terms to be shorter than your suppliers’ payment terms to avoid cash flow issues?
These are all important things to consider when setting your payment terms. Invoices with short payment terms (~14 days) are more likely to go past due, but you will get your money sooner than if you give longer payment terms. And according to an analysis by Xero Australia, close to 75% of invoices are asking for payment within two weeks.
Data based on millions of Australian invoices sent via Xero. Image credit: Xero
2. Communicate your payment terms clearly
Although it may seem obvious, after considering your payment terms, you need to ensure you clearly communicate to your customers what your payment terms are.
We suggest creating a contract or sales agreement that outlines your payment terms in writing, for you and your client to both sign.
Setting your payment terms and being clear with your customers about your terms from the start will help eliminate cash flow issues and prevent disagreements down the track.
3. Consider penalties for late payment
Part of the crystal clear payment terms you provide may include a clause about late payments. They are there to act as a major deterrent to late payments.
A late payment clause can be included in your signed contract or sales agreement, outlining the penalties (such as interest, late fees and/or collection costs) if payments are made after the due date.
It is important to mention your customers can also provide documentation outlining terms. Be wary of any documents from your customers that may negatively impact your payment terms, such as your penalties for late payments.
4. Use reminder notifications
Reminder notifications can often be far more effective than missed payment notifications. It’s courteous, provides a more positive customer experience, and most importantly — it steps in as a countermeasure to chasing up late payments.
Here are some best practices to keep in mind for payment reminders before the invoice is due:
Deciding on when you want to send your invoice reminder is up to you and what works for your business. You could decide based on the amount you are invoicing for. If it’s quite a large lump sum, you may want to give a bit more of a heads up
Make sure you include relevant information that covers off the basics such as your company name, information about the customer’s order, account balance or payment history
Clarify how a customer can pay you and what payment methods you accept. If you are using an online payment method, make sure you outline how easy it is to settle the invoice
Include the due date of the invoice
If you are sending payment reminders after the invoice is due, typically you should start this process 1-2 days after, and you can reinforce the late payment fee.
If a late payer complains about a late payment fee, you can then explain that you understand it can sometimes be hard to stay on top of all payments, but that you have done what you can to help by outlining your payment terms, as well as reminding them prior to payment.
If you think payment reminders sound great, but that you don’t have the time to manually email or SMS every client to remind them that a payment will soon be due, Ezidebit offers clients automated payment reminders to save you time and money – and – late invoices.
Want to know more? Send an enquiry to one of our friendly payments consultants who can help you get started.