A Founder's Guide to Payment Terms
Establishing clear, effective payment terms is foundational to maintaining healthy cash flow and strong client relationships. This guide provides recommendations for structuring payment terms across different business types, with considerations for timing, methods, and communication strategies.
- Clarity is King: Clear payment terms, established upfront, reduce misunderstandings and late payments.
- Tailor Your Terms: Different business models (e.g., project-based vs. retainers) require different payment structures.
- Incentivize Speed: Offering small discounts for early payment can significantly improve cash flow.
Standard Net Payment Terms
Net payment terms specify the timeframe within which clients must pay after receiving an invoice. Common formats include Net 15, Net 30, Net 45, or Net 60, with the number representing days until payment is due.
Considerations When Selecting Net Terms
- Industry standards: Some industries have established norms (e.g., Net 30 is common for many professional services).
- Cash flow needs: Businesses with high overhead might need shorter terms.
- Client relationships: Longer terms might be offered to established clients.
- Project scale: Larger projects might warrant longer payment windows.
Best practice is to select the shortest terms that remain reasonable within your industry and market position. Always clearly state your terms on quotes, contracts, and invoices using consistent language.
Milestone-Based Payment Structures
For longer projects, milestone payments break compensation into phases tied to specific deliverables or time periods. This approach helps maintain cash flow throughout projects while reducing risk for both parties.
| Payment Stage | Typical Percentage | Timing |
|---|---|---|
| Deposit/Upfront | 25-50% | Before project commencement |
| Milestone 1 | 20-25% | Upon completing defined deliverable |
| Milestone 2 | 20-25% | Upon reaching second deliverable |
| Final Payment | 10-25% | Upon project completion |
Milestone-based structures work particularly well for creative services, consulting, software development, and construction. Each milestone should be clearly defined with objective criteria for completion.
Retainer Arrangements
Retainer models provide predictable income through regular pre-payments for ongoing services. These arrangements benefit both parties with stable cash flow for providers and priority service for clients.
Effective Retainer Practices
- Set clear scope boundaries for what's included in the retainer.
- Establish whether unused hours/services roll over or expire.
- Define processes for handling work that exceeds retainer limits.
- Document how and when retainer payments are due.
- Create regular reporting on retainer usage and value delivered.
Early Payment Incentives
Offering discounts for early payment can significantly improve cash flow. Common structures include 2/10 Net 30 (2% discount if paid within 10 days, otherwise full payment due in 30 days) or similar variations.
Example: 2/10 Net 30
A 2% discount is offered if an invoice is paid within 10 days; otherwise, the full amount is due in 30 days. For a $1,000 invoice, this means paying $980 within 10 days.
Legal Considerations & Documentation
Payment terms should be properly documented in your contracts and invoices to ensure they're legally binding and enforceable. While our platform helps automate reminders based on your terms, you are responsible for the legal standing of the agreements themselves.