How to agree business credit terms

Whether you're in business on your own, or part of a company, it's essential to protect your income - and one of the greatest areas of risk is when you extend a line of credit to a customer.

Remember, any time you carry out work, or provide goods or services, without taking payment upfront, you effectively become a creditor.

That means you need to think carefully about several different factors, for instance:

  • How will you accept payment? Do you need cash on delivery, or can you wait until later
  • What is the absolute longest you would be prepared to wait for payment
  • How much can you risk - how much could you bear to lose if the client fails to pay
  • What action are you prepared to take against late or non-payment?
  • How convinced are you the client both can pay and will pay promptly?

It's not fun thinking about customers failing to pay you, but it's essential to admit to yourself that this can (and eventually, probably will) happen, and take action upfront to prepare for this eventuality.

State your terms

Once you have decided on your payment terms - from upfront deposits, to payment deadlines, to actions you will take on non-payment - make sure you clearly state them to your customers from the outset.

The earlier in the client relationship you state your terms, the more chance you have of enforcing them - it's no good waiting until you invoice and then putting everything in the small print.

If you are uncertain about how to word your terms, speak to a business advisor or solicitor; there are specialists who can help self-employed individuals and small businesses with this, and although you're likely to have to pay, the cost can be equivalent to just one unpaid invoice in many cases.

Don't rely on clients to find your terms buried somewhere within your website - put them in your opening email with the customer, or link prominently to them, and ask the customer to clearly accept them.

You don't have to go so far as to send paper contracts in the post - simply typing their name in a reply email is enough to count as your customer digitally 'signing' your terms - and with it this easy to protect yourself, there's really no excuse for not doing it.

Enforce your conditions

If you have clearly warned your customers of the rules in advance, they can really have no excuse for failing to pay - which again highlights why clear terms and conditions are a must if you're serious about your business.

Be as lenient as you're comfortable with, particularly for customers who have always paid well in the past, but once you realise that you are unlikely to get what you are owed, don't be afraid to enforce your terms.

Spelling it out in advance means you are able to apply the full range of penalties permitted under law - including penalty costs, statutory interest, and charging the debtor for any recovery fees.

This can allow your terms and conditions to help boost the amount you actually get paid, as well as your chances of success when pursuing recovery action, making them an all-round good idea.

For more information on how to set appropriate credit terms see the excellent guidance from the Institute of Credit Management and The Department for Business Innovation and Skills that can be found right here on our blog Part one "Knowing Your Customer" and Part Two "Payment Terms" also don't forget to check out our guide on "How to Credit Check a Customer (for free!)"

Image "Credit Risk" by Flickr user Simon Cunningham is licensed under CC BY 2.0

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