May 2, 2023

Merchant Services

Why You Need Payment Terms For Your Business

Merchant Services

What Are Payment Terms?

Payment terms simply state how and when an invoice is to be paid. In most cases, payment terms are printed clearly on an invoice so there is no ambiguity between the buyer and seller, they often include specific information about the expected method of payment and the timeframe in which the payment will be made. While most online and brick-and-mortar retailers require payment in full, many service providers opt for 50% down to begin a project with the balance due when the project is completed. Wholesale suppliers often will extend more generous terms for purchases made in large quantities. (10, 30, or 60-days with approved credit.)  

What Payment Terms May Include:

Beyond the payment due date, some companies include other enticing conditions for payment such as discounts for early payment. Say you have a 30-day term, but the vendor offers a 5% discount for a payment made within ten days. That's a great incentive to pay your bill a little earlier than required. Conversely, vendors will sometimes opt to charge a penalty for late payments. Anyone who has paid a credit card bill late knows that financial institutions tack on high-percentage penalties for paying even a few days late.  

What Type of Payment Terms are there?

Payment terms need to provide clear details about the expected payment on a sale. Often, payment terms are included on an invoice and specify how much time the buyer has to make a payment on the purchase. Often this information can be included on the receipt. This printed record serves as an important reminder that the customer can set aside their expected payment.

Here Are Some Common Types of Payment Terms:

  • Bulk discounts - Get discounts for purchasing larger quantities of an item
  • Coupons - These must spell out certain terms and limitations: such as a certain quantity has to be purchased and customers must be 18 or 21 to purchase certain items like cigarettes, alcohol, and cannabis, and expiration dates
  • Disability discount - Offer discounts to differently-abled customers¬†
  • Discount card - Issuing cards that give a certain group of customers a discount¬†
  • Educator or student discount - Usually given to students, but may go to educators
  • Employee discount - Offered to employees and sometimes to their family members
  • Forward dating - Moving the invoice date forward so that the payment is made after receipt of goods
  • Military discount - offered to members of the military and their family members
  • Partial payment discount - When a seller needs cash flow, he may offer a partial discount
  • Preferred payment method discount - Some retailers give customers a percentage of their purchase if they pay with cash. This saves the seller credit card fees.
  • Prompt payment discount - retailer and manufacturers give discounts to the retailer at the list price or catalog price for paying by a certain date
  • Rebates - A refund mailed to the purchaser after a purchase. Usually, proof of purchase is required
  • Sliding scale - This discount is calculated on a person's ability to pay and is common with non-profit organizations and some healthcare providers.
  • Seasonal discount - Usually this is given during a predictably slow business cycle period when sales could use a boost.
  • Children's discount - Provides free or discounted prices for children under a certain age. There is usually a requirement that the accompanying adult pays full price.
  • Trade discount - Payments for functions such as shelf stocking, warehousing, or shipping
  • Trade-in credit - A discount for something that is returned. Common in motor vehicle sales

Common Invoice Payment Terms:

  • PIA - Payment In Advance.  
  • COD- Cash On Delivery
  • Net 7 - Payment seven days after the invoice date.
  • Net 10 - Payment ten days after the invoice date.
  • Net 30 - Payment 30 days after the invoice date.
  • Net 60 - Payment 60 days after the invoice date.
  • Net 90 - Payment 90 days after the invoice date.
  • EOM - End of the month.

Is There a Benefit to Providing Longer Payment Terms?

Extended payment terms can bring in new customers and increase working capital reducing the need to rely on corporate loans and provides more cash stability during the natural ebb and flow of expenses. Extending payment terms to suppliers is a surefire way to boost the perception of your company‚Äôs stability and creates trust in your suppliers. Cultivating lasting relationships with quality suppliers helps you provide consistently good experiences to your customers. As a business owner, you want to offer the best product lines, the products that set you apart from your competitors. You want to understand the buying habits of your clients and you want to create a purchasing process that your customers will love.  

How Do Payment Terms Protect Your Business and Sales?

Terms of payment help you get paid faster and provide you with predictable cash flow that you need to manage to staff properly and maintain accurate inventory levels. Keeping the cash flowing keeps your business growing. By not enforcing your payment terms you can risk slowing down the momentum of your business. Payment terms can also benefit your business by rewarding loyal customers with more generous terms.

How Do Payment Terms Help Reduce Chargebacks & Resolve Disputes?

To reduce the number of chargebacks your business encounters make sure that customers know exactly what they are paying for and when they can expect to receive their merchandise. Receiving the wrong item, or worse, a sub-par item is a huge disappointment. How you handle it from here will determine if you‚Äôll ever see that customer again. Of course, the gold standard for online customer service is Amazon. You receive your order and it's not quite what you expected. You go to their website and with two clicks you print a return label, put the item back in its box and ship it back free. They even make it easy to mail the package by installing Amazon drop boxes in high-traffic areas.    

And always use your DBA on billing statements. Many credit card payments are disputed because customers don‚Äôt recognize the business name on their credit card statement. Retailers need to use the name that their customers identify with. Service providers need to be transparent about the scope of work, the cost of goods and services, and a reasonable estimation of a completion date. For online businesses, your website should include detailed product descriptions, up-to-date product pricing, and a choice of shipping methods. All businesses should communicate, preferably in writing, what their product warranties are and instructions for returning a faulty product.  

With Convenience Come Fraudsters

Global online purchases are predicted to surge past $5 trillion by the end of this year. That's trillion, with a "T". More and more shoppers who traditionally would have preferred to shop in a store built of stone, glass, and steel are now making their first purchases online, exposing themselves to fraud every time they shop. With so many customers storing credit card details and making payments online, identity thieves are working overtime to harvest their personal information. And once they find out their accounts are compromised, they cancel their credit card and file a dispute. You shipped out an item to a hacker and charged someone's credit card who will have their transaction reversed. Now you're out of the merchandise and the payment.  

Establish an Easy-to-follow Refund Policy

Make sure your customers understand your return and refund policy when they make a purchase in-store or online. Keep it simple and easy-to-follow. If you are not 100% satisfied with your purchase, you can return the product and get a full refund or exchange the product for a similar one. Any product you return must be in the same condition you received it and in the original packaging. With clothing, many retailers require that the tags remain on the garment you're returning.

It Usually Includes the Following Pieces of Information

  1. The number of days that your customer has to return the product.
  3. How the buyer will receive their refund? (Cash, store credit, or item replacement.)
  5. How soon will the buyer receive their refund?
  7. If the item is purchased online can it be returned to the store?
  9. Who pays for shipping to return the product by mail?
  11. And more, like with original tags, packaging, and in the condition in which it was shipped

If the majority of your sales comes from ecommerce, then you have significantly more real estate to communicate the terms and conditions for doing business with your brand.  

Set Realistic Expectations

It's still all about providing the best customer experience, the best value, and the best product. Whether your store is downtown or on the web, you need to be clear about what your brand represents. Not just by what you sell but by how you make the customer feel. Give discounts for large purchases or offer free shipping. Create loyal customers by offering generous payment terms or increase cash flow with discounts for paying early. Define your terms and conditions simply, and upfront and you'll be seeing the same customers again and again.