The Importance Of Clear Payment Terms

Your Payment Terms With Your Customers

It depends upon your business as to what payment terms you give customers.

Ideally, you want cash upfront or cash on purchase. However, not all businesses have the luxury of this. If you do give credit, the terms on which the credit are given need to be made clear to the customer, to give the customer the best chance of complying with them.

Terms and conditions can be tailored by a solicitor to meet your exact requirements. It is dangerous to copy and paste terms and conditions off the internet or from a supplier. Very often they have been drafted specifically by a solicitor for that particular business.

Whether you go to the expense of getting a solicitor to prepare terms and conditions for you, is a decision for you. Having them in place however, will usually make resolving any disputes more easy.

At the very least, you ought to make clear to the customer the key terms you supply your goods or services, including when payment falls due.

There are lots of other useful steps you can take to improve your cash flow and to make life easier when pursuing unpaid invoices, download a copy of our free guide to cash flow by completing the form.

Payment Terms With Your Suppliers

You ought to also check the payment terms you have with your own suppliers.

Payment terms with suppliers will vary from industry to industry. Generally, you want as much time as you can get to pay your suppliers. Money is better in your pocket than the supplier’s as far as your cash flow is concerned. However, a balance needs to be struck. Pushing for extended payment terms or simply paying invoices late, could be damaging to your relationship with your supplier.

New businesses will struggle to negotiate more favourable payment terms, as there will be no track history of payments or the amount of trade they will provide. However, as relationships develop with suppliers, with orders placed and invoices paid, the supplier may be prepared to alter payment terms if asked.

Large suppliers may be particularly reluctant to alter payment terms, given the number of customers they may have. You may find a take it or leave it attitude.

A different approach from seeking more generous time for making payment, is to see if there is any incentive to pay quickly or to pay in cash, such as a dicount.

EU Regulation Of Payment Terms

In 2013, the UK (and the rest of the EU) were made to implement rules about payment terms between business. A very helpful guide can be found here. In short, the regulation says:

  • Maximum payment terms in a contract should be 60 days (or 30 days if payment is by a public body). They can only be more if not “grossly unfair” on the creditor.
  • If the contract is silent on payment terms, 30 day payment terms are to apply.
  • Interest and late payment compensation is due on any overdue payments. This has already been in place in the UK for many years. The interest must be a minimum of 8%. It is up to the creditor whether it actually imposes this or tries to recover the amounts.