While it would be ideal for your customers to pay as soon as the product is received, this is often not how business is done. Many times, customers will expect payment terms that allow them to buy on credit. This allows them time to make sales of their own and generate cash flow in order to pay for your product. It is a system that can have drawbacks at times but often can allow you to expand your sales and grow your business.
Net Terms
Credit terms can be a complicated topic (link), but the most common credit terms are what is called “Net Terms”. Common Net Terms are Net 15, Net 30, Net 45, and Net 60. The number following the Net is the number of days that the customer has to pay following them receiving the invoice.
While this has become an industry standard, one way to get your customer’s to pay quicker is to incentivize early payment.
Credit Term Discounts
Here are some possible discounts you could offer to encourage your customers to pay their invoices early:
2/10 net 30
Definition: The customer is required to pay within 30 days of when the invoice is received. The customer will receive a 2% discount if they pay within 10 days of receiving the invoice.
Common variations: 2/10 net 40, 2/10 net 60, 1/10 net 30, etc.
Should You Use It: This type of rate is ideal for businesses that need to have cash as quickly as possible because it speeds up the cash cycle. To learn more about the interest rate impact of this type of policy, refer to the accounting guide found here (link)
EOM Discounts
3/7 EOM
Definition: The customer will receive a 3% discount if the invoice is paid within 7 days of the last day of the month indicated on the invoice. If the invoice is received on or before the 25th day of the month, then the payment would be due on the 7th day of the next calendar month.
3/7 EOM net 30
Definition: The customer is required to pay within 30 days, but will receive the 3/7 EOM discount if paid in advance, given the terms listed above.
Should You Use It: For the means of early payment to decrease bad business debt, EOM terms can be more confusing for customers because it is not as clear for when the payment is due.
ROG Discounts
2/15 net 30 ROG
Definition: The customer is required to pay within 30 days of receipt of goods, but will receive a 2% discount if paid in 15 days of receiving the invoice.
Should You Use It: Industries often uses the ROG terms when buyers cannot expect delivery until a long time after they place the order.
Partial payment discount or program
If your company requires immediate cash flow, it is possible to receive some of the payment immediately. Often companies provide a 30-30-40 program, where customers are required to pay 30% up front, 30% at the time of the invoice and 40% on terms following the receipt of the invoice. This still allows your customers to have flexibility but allows you to have immediate cash flow.
Discounts are a great way of encouraging your customers to pay quicker, but it is important you are very clear about the expectations and requirements before any changes to your credit terms are made.