How to Set Clear Payment Terms and Enforce Them

One of the most important aspects of running a successful business is setting clear payment terms with clients and enforcing them. Failing to do so can result in missed payments, cash flow issues, and ultimately, a damaged bottom line. However, for many entrepreneurs and small business owners, navigating payment terms and enforcing them can be a challenging task. In this comprehensive guide, we’ll provide you with step-by-step guidance on how to set clear payment terms and enforce them effectively.

Step 1: Understand the Different Types of Payment Terms

Before you can set clear payment terms, it’s important to understand the different types of payment terms that are commonly used in business. The most common types of payment terms are:

1. Net 30: Payment is due 30 days from the invoice date.
2. Net 60: Payment is due 60 days from the invoice date.
3. Net 90: Payment is due 90 days from the invoice date.
4. Upfront payment: Payment is due before the work begins.
5. Installments: Payment is divided into several payments over a set period of time.

It’s important to consider which payment term is appropriate for your business and the type of work you’re doing. For example, upfront payment may be appropriate for new clients or for projects with a high level of risk, while installment payments may be appropriate for long-term projects.

Step 2: Clearly Define Payment Terms in Writing

Once you’ve decided on the appropriate payment term, it’s important to clearly define it in writing. This will help to avoid misunderstandings and ensure that both parties are on the same page. Your payment terms should include:

1. Payment amount: This is the amount the client owes you.
2. Payment due date: This is the date by which the client must pay you.
3. Late payment penalties: This is the penalty that will be applied if the client fails to pay on time.
4. Payment methods: This is the method the client can use to pay you (e.g., credit card, check, wire transfer, etc.).
5. Payment schedule: If you’re using installment payments, this is the schedule for when each payment is due.

Make sure to include these payment terms in your contract or invoice and have the client agree to them before starting work.

Step 3: Send Invoices Promptly and Follow Up

To ensure timely payments, it’s important to send invoices promptly and follow up if payment is not received by the due date. Your invoice should include the payment terms you’ve agreed upon, as well as a clear description of the work you’ve done or products you’ve delivered. It’s also a good idea to include a payment reminder in your invoice, such as “Please remit payment by the due date to avoid late fees.”

If payment is not received by the due date, send a polite reminder to the client. This can be done via email or phone call. Make sure to follow up promptly and be persistent in your reminders. If the client continues to miss payments, it may be necessary to take more drastic measures.

Step 4: Enforce Payment Terms

If a client continues to miss payments despite your reminders, it may be necessary to take legal action. Here are some steps you can take to enforce payment terms:

1. Hire a collections agency: A collections agency can help you recover unpaid debts. They will typically take a percentage of the recovered amount as their fee.
2. File a lawsuit: If the amount owed is significant, it may be necessary to file a lawsuit against the client. This can be a time-consuming and expensive process, so it’s important to weigh the costs and benefits before proceeding.
3. Suspend services: If the client has not paid for ongoing services, you may need to suspend those services until payment is received. This can be an effective way to motivate the client to pay, but it’s important to ensure that you’re not violating any contractual obligations by doing so.
4. Offer payment plans: In some cases, it may be possible to work out a payment plan with the client to help them pay off their debt over time. This can be a good option if the client is experiencing temporary financial difficulties.

Regardless of the method you choose, it’s important to remain professional and courteous when dealing with clients who have failed to pay. Remember that your ultimate goal is to recover the debt owed to you, not to damage your relationship with the client.

Step 5: Learn from the Experience

If you’ve had trouble with payment terms and enforcing them in the past, it’s important to learn from the experience and make changes to prevent similar problems in the future. Here are some things to consider:

1. Tighten up your payment terms: If you’ve had clients who consistently miss payment deadlines, it may be time to reevaluate your payment terms. Consider shortening payment deadlines or requiring upfront payment to minimize your risk.
2. Implement an automated payment system: An automated payment system can help to ensure timely payments and reduce the need for manual follow-up.
3. Communicate clearly: Clear communication is key to setting expectations and avoiding misunderstandings. Make sure your payment terms are clearly defined in writing and that your clients understand what is expected of them.
4. Stay organized: Keeping track of invoices, payments, and reminders can be a challenge, especially as your business grows. Consider using a payment tracking system to help you stay organized and on top of your payment terms.

Conclusion

Setting clear payment terms and enforcing them is essential to running a successful business. By understanding the different types of payment terms, clearly defining payment terms in writing, sending invoices promptly and following up, enforcing payment terms, and learning from the experience, you can minimize your risk and ensure timely payments from your clients. While it may take some time and effort to get it right, the benefits of a solid payment process are well worth the investment.

Sources:

1. Entrepreneur. “5 Tips for Establishing Payment Terms.” https://www.entrepreneur.com/article/282151
2. Forbes. “5 Strategies for Ensuring Payment on Time and Avoiding Bad Debt.” https://www.forbes.com/sites/theyec/2019/03/12/5-strategies-for-ensuring-payment-on-time-and-avoiding-bad-debt/
3. Inc. “10 Tips for Dealing With Late-Paying Clients.” https://www.inc.com/guides/2010/08/10-tips-for-dealing-with-late-paying-clients.html
4. QuickBooks. “How to Set Up Payment Terms and Late Fees.” https://quickbooks.intuit.com/r/getting-paid/how-to-set-up-payment-terms-and-late-fees/
5. Small Business Trends. “7 Ways to Ensure You Get Paid on Time and Avoid Slow Payers.” https://smallbiztrends.com/2017/04/get-paid-on-time.html
6. Accounting Today. “5 Steps to Improve Your Firm’s Billing and Collection Processes.” https://www.accountingtoday.com/opinion/5-steps-to-improve-your-firms-billing-and-collection-processes
7. The Balance. “Tips for Dealing With Late Payment of Invoices.” https://www.thebalance.com/tips-for-dealing-with-late-payment-of-invoices-2951799
8. SCORE. “How to Get Your Invoices Paid Faster.” https://www.score.org/resource/how-get-your-invoices-paid-faster
9. Harvard Business Review. “Get Your Clients to Pay on Time.” https://hbr.org/2018/09/get-your-clients-to-pay-on-time
10. Entrepreneur. “4 Reasons Your Clients Don’t Pay You.” https://www.entrepreneur.com/article/308636
11. American Express. “5 Things to Know About Payment Terms and Your Small Business.” https://www.americanexpress.com/en-us/business/trends-and-insights/articles/payment-terms-for-small-businesses/
12. Business News Daily. “How to Deal With Late-Paying Clients.” https://www.businessnewsdaily.com/7678-late-paying-clients.html
13. Small Business Administration. “Dealing With Late Payment.” https://www.sba.gov/funding-programs/loans/lender-match/business-loan-payment-terms/dealing-late-payment
14. Investopedia. “Understanding Payment Terms.” https://www.investopedia.com/terms/p/payment_terms.asp
15. Business.com. “How to Ensure On-Time Payments.” https://www.business.com/articles/5-steps-to-ensure-on-time-payments/
16. National Federation of Independent Business. “Getting Paid: What to Do When a Customer Doesn’t Pay.” https://www.nfib.com/content/resources/money/getting-paid-what-to-do-when-a-customer-doesnt-pay/
17. Clio. “The Attorney’s Guide to Getting Paid.” https://www.clio.com/resources/the-attorneys-guide-to-getting-paid/
18. Inc. “The 10 Most Common Reasons Small-Business Owners Don’t Get Paid on Time.” https://www.inc.com/drew-greenblatt/the-10-most-common-reasons-small-business-owners-dont-get-paid-on-time.html
19. HubSpot. “How to Write an Invoice: The Essential Guide.” https://blog.hubspot.com/sales/how-to-write-an-invoice
20. Freelancers Union. “How to Handle Late Payments (and Non-Payments) as a Freelancer.” https://blog.freelancersunion.org/2018/01/22/how-to-handle-late-payments-and-non-payments-as-a-freelancer/
21. Law Technology Today. “How to Get Paid: Best Practices for Law Firm Billing and Collections.” https://www.lawtechnologytoday.org/2019/06/how-to-get-paid-best-practices-for-law-firm-billing-and-collections/
22. AccountingWEB. “Best Practices for Improving Law Firm Cash Flow.” https://www.accountingweb.com/practice/practice-excellence/best-practices-for-improving-law-firm-cash-flow
23. Law Practice Today. “Tips for Law Firm Billing and Collections.” https://www.lawpracticetoday.org/article/tips-for-law-firm-billing-and-collections/
24. ABA Journal. “Getting Paid.” https://www.americanbar.org/publications/gp_solo/2015/september-october/getting-paid/
25. LexisNexis. “Law Firm Billing Tips.” https://www.lexisnexis.com/community/practicegroups/thepracticallit