Making sure your customers pay on time is essential to creating a healthy cash flow. It’s particularly important during the first few years of your business when you’re trying to establish yourself and avoid any cash flow problems that could get you into trouble. To make sure that you don’t run into these issues, you should establish appropriate payment terms for sole traders.
Essentially, this refers to making clear agreements with your customers and developing good invoicing habits so that you can stay on top of your finances. Keep reading to find out more about small business payment terms and why it’s crucial to get them right.
What are appropriate small business invoice payment terms?
With almost half of all invoices paid late, it’s easy to see how small businesses can start to run short on cash from time to time. However, establishing the appropriate terms and conditions can help you steer clear of these situations.
Firstly, you should inform your customers of how they can make their payment, and information about any penalties should they fail to make a timely payment. Let customers know which payment methods they can use, as well as the currencies that you can accept. It might be a good idea to introduce some late payment charges to cover any negative effects that this may have on your cash flow.
Having said this, probably the most important small business invoice payment term is the due date. Traditionally, 30 days was given for most payments, but this is changing. The old 30-day due date was largely due to the delays that could occur through mail and payment by cheque, but now that electronic invoicing is the new norm, these long payment terms are becoming less relevant. Choosing a shorter term such as one week creates a greater sense of urgency and reduces the time it takes you to get paid.
How to avoid late payments
While ultimately the customer is responsible for any late payments, there are some steps that you can take to ensure prompt payments. As previously mentioned, choosing the right sole trader payment terms will remind the customer of your expectations and can help to avoid any disagreements down the line. In addition to this, you can take action to speed the process along:
Never put off invoicing. You should aim to send off your invoice as soon as a service or product has been delivered, as the payment term does not begin until the client has actually received the invoice. You can speed up this process by using templates and software to automatically send invoices.
Make sure that you keep a record of inventory and time as you complete a job. This means that when it comes to writing your invoice, you already know exactly what you need to charge the client, and so the process will be much quicker.
Part of your sole trader payment terms includes what to do in the event of late payment. Although it may not be the most enjoyable job, it’s important to follow up late payments quickly so that you can resolve the issue. Begin small with a friendly reminder email, and you can resort to phone calls if you’re having trouble getting hold of someone.
Should I use a sole trader payment terms template?
While it may be tempting to use a readymade sole trader payment terms template, it’s unlikely that you will find one that will exactly suit the needs of your business. Nevertheless, it’s a good idea to write your own template that can be adapted depending on the product or service that you are providing. You’ll find that many of your payment terms are quite similar, and having a basic template that can be tweaked will make it easier to establish agreements with new customers.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.