Guide

Invoicing and payment terms

Setting suitable payment terms for your customers

Some businesses offer certain levels of credit to customers - ie supplying goods or services to customers before taking payment. However, if customers do not pay promptly, it can place a considerable strain on your business as the income you need to run your business is delayed.

To safeguard your cashflow, you should check up on your customer - by using information supplied by credit agencies, analysing company accounts or obtaining bank and/or trade references before you give credit.

For more information on carrying out credit checks, seeĀ credit checking your customers and setting credit limits.

Payment terms and conditions

You should explain your terms and conditions to customers at the start of your relationship. You can send out a written confirmation of their order with a copy of your terms and conditions of sale. This lets them examine the terms and conditions and discuss any problems they have before you supply goods or services.

You should also print the terms and conditions on the back of your invoices.

You could consider encouraging electronic payment in your terms and conditions, eg via BACS or CHAPS. These systems prevent the risk of bounced, missing or lost cheques. Read about BACS payment for small businesses.

The UK Payments Administration also provide information on CHAPS payment.

Also consider sending your invoices electronically - with a copy of your terms and conditions - as it can be much quicker than the post. For more information, see ensuring customers pay you on time.

Early payment discounts

You might encourage customers to pay early by offering a discount for early payment. The level of the discount should depend on the profits you are making on orders. This can help to speed up payment, improve cashflow and reduce bad debts.

However, there can be disadvantages to early payment discounts, in particular the financial cost to your business.