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How to Set B2B Customer Payment Terms (B2B)

 Person working on a laptop.

When setting payment terms, one factor to consider is your history with your customers. How can your payment terms strengthen existing partnerships and grow new ones? — Getty Images/ Nitat Termmee

Payment terms are arguably the most essential part of an agreement you sign with your B2B clients. Payment terms dictate when a customer should pay you, what forms of payment you accept, and any charges for late payment.

Setting customer payment terms upfront can save your accounting team frustration down the road — one-third of merchants report that delays in receiving payments is putting their business at risk of closure. Here’s what to consider when settling on payment terms with your customers to keep your cash flow running smoothly each month.

Set your payment deadlines wisely

There are five common ways you can request a client pay for your product or service. The payment terms you use will directly impact your cash flow.

The most common payment terms are:

  • Pay in advance: The client must deposit all or part of
    the total payment before your company begins work. For instance, you
    might require 20% of the payment upfront and the balance on completion
    of the service.
  • Due on receipt: The client must pay the amount
    requested immediately upon receiving the invoice for your services.
    Typically, this signifies payment due the following business day.
  • Net 30, 60, 90, etc.: The client has 30, 60, or 90 days
    in which the payment is due. Net 30, for instance, means the client has
    to settle their account within 30 days of the date listed on the
  • 5% 10 net 30: The client will receive a 5% discount if
    their invoice is paid within 10 days; otherwise, they must pay the full
    amount within 30 days. This incentivizes clients to pay sooner rather
    than later.
  • Line of credit: The client has a line of credit and can pay invoices monthly or quarterly.

Any of these payment terms could work for your business, but it’s important to see your customer payment deadlines in a way that allows you to pay your suppliers, vendors, and employees, too. “The best invoice payment terms are the ones that provide enough cash to keep your business running while carefully considering your clients’ needs,” wrote Fit Small Business.

[Read more: Guide to Negotiating Payment Terms With Your Vendors]

It’s important to set payment terms that spell out the late fees and possible penalties for consistently paying late.

Offer as many payment methods as possible

Accepting different forms of payment can help you better manage your cash flow. “When defining acceptable methods in your payment terms, make it as convenient as possible for your clients,” wrote Freshbooks. “There are many variables to consider depending on how many payments you process each month, but overall, letting clients pay their preferred way gets you paid faster.”

B2B businesses may not use as many payment methods as B2C companies. Still, you might consider accepting payment by check, ACH transfer, credit and debit cards, wire transfer, and even types of online payments, which can make it easy for clients to make due on receipt transfers.

[Read more: 3 Scaling Startups Each Share Their Playbook for B2B Growth]

Consider the customer history and long-term value

Often, B2B customer relationships are the backbone of sustainable growth. The better partnerships you’re able to build with your B2B clients, the more likely they are to stay with your company over a competitor.

As a result, consider how you can offer payment terms that account for the history you have with a customer and the lifetime value you hope they will bring. Some B2B companies offer early payment discounts to start building favorable relationships with customers. Others will offer payment plans as a benefit to prevent someone from leaving for a competitor. Your payment terms can be used as a customer retention tool to show your clients how much you value their continued service.

Set late fees

In a perfect world, all your customers would pay on time—or even early! Unfortunately, that’s unlikely to be the case. It’s important to set payment terms that spell out the late fees and possible penalties for consistently paying late. Most business owners charge 1.5% to 2% of the invoice amount as a late fee for past-due invoices. Making those expectations clear when you agree to the contract terms can help avoid unpleasant conversations in the future.

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Published January 17, 2023

Emily Heaslip

This post was originally published on this site

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