Five Payment Terms That Can Help You Get Paid Faster

Whilst debt recovery is often viewed as something that begins after an invoice becomes overdue, the reality is that many payment disputes can be avoided, or at least made easier to resolve, by getting the payment terms right from the outset.

Here are five practical changes businesses should consider if they want to improve cash flow, reduce late payments and strengthen their position when debts arise.

Stop Offering Lengthy Credit Terms by Default

Many businesses offer 30-day or 60-day payment terms simply because they always have (“…it’s what we’ve always done!”).

The difficulty is that every additional day effectively provides the customer with interest-free credit, while the company might be struggling with cash flow (when otherwise avoidable).

Whilst longer payment terms may be commercially necessary in some sectors, businesses should actively consider whether they remain appropriate rather than treating them as standard

Where commercially viable, reducing payment periods or (preferably) requiring payment on receipt/presentation can:

  1. improve cash flow;
  2. reduce the risk of accumulating aged debts;
  3. encourage clients to deal with invoices promptly; and
  4. allow earlier recovery action where payment is not made.

Simply shortening payment terms can often have a greater impact on cash flow than many businesses realise.

Be Clear About When Payment Falls Due

One of the most common causes of payment disputes is uncertainty. Invoices should make it crystal clear:

  1. when payment becomes due (i.e. “Payment on presentation”); and
  2. how payment should be made (inclusive of relevant details).

Use Interest as a Commercial Incentive

Most businesses know they can charge interest on overdue debts.

The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses important rights when dealing with overdue commercial debts. In qualifying business-to-business transactions, creditors may be entitled to statutory interest at 8% above the applicable Bank of England reference rate, together with fixed compensation and potentially reasonable recovery costs.

The legislation currently provides for fixed compensation of:

  1. £40 for debts (each invoice) below £1,000;
  2. £70 for debts (each invoice) between £1,000 and £9,999.99; and
  3. £100 for debts (each invoice) of £10,000 or more.

Many businesses never mention these rights until a debt recovery solicitor becomes involved.

A contractual interest clause can also be included within standard terms and conditions to provide certainty and create a meaningful commercial incentive for prompt payment.

The prospect of a debt increasing each day often encourages resolution long before proceedings become necessary.

Do Not Wait Too Long to Act

Even the best payment terms lose value if businesses ignore them. Many organisations allow invoices to become 60, 90 or even 120 days overdue before taking meaningful action.

Review Your Standard Terms and Conditions

Many businesses devote considerable time to pursuing unpaid invoices whilst rarely reviewing the contractual terms that govern payment.

That can be a costly mistake.

A properly drafted set of standard terms and conditions may include provisions dealing with:

  1. interest on overdue invoices;
  2. recovery/enforcement costs;
  3. suspension of further services or deliveries;
  4. personal guarantees;
  5. retention of title rights for suppliers of goods; and
  6. termination rights where payment is not made.

Although these provisions may never be needed, they can significantly strengthen a business’s position when disputes arise. Importantly, many of these protections must be incorporated into the contract before they can be relied upon later.

Conclusion: Prevention Is Better Than Recovery

Debt recovery is often viewed as something that starts when payment stops. The strongest debt recovery outcomes are frequently achieved long before an invoice becomes overdue.

Businesses that use clear payment terms, maintain effective credit control procedures and regularly review their contractual documentation place themselves in a much stronger position when problems arise.

A relatively small investment in reviewing payment processes and standard terms can often save significant management time, legal costs and cash flow pressures in the future.

How Wellers Can Help

At Wellers Law Group, our Commercial Litigation team advises businesses across London, Kent and the Southeast on debt recovery/enforcement, commercial disputes and the drafting of effective terms and conditions.

If your business is struggling with unpaid invoices, late payments or commercial debt recovery issues, contact James Day at james.day@wellerslawgroup.com or on 01732 457575 for a no-obligation initial discussion.