Setting up a payment policy for your small business can seem like a hassle. Writing out all the rules you should have for customers might seem unnecessary, especially if you’re just starting out. In fact, you might not even know what rules you want to include in your policy—like whether you need to have late fees.
But whether you’re a freelancer with a few clients or a small business owner with a brick-and-mortar store (or something in between), having a detailed payment policy can help save you trouble by answering your client’s payment-related questions ahead of time—and make sure you’re on the same page before you start working together.
So what, exactly, is a payment policy? And how do you create it? Let’s find out all that and more.
What Is a Payment Policy?
A payment policy or procedure is where you lay out all the rules for how customers pay you.
For example, your policy might include details about when a customer needs to pay you, which payment options they can use, and how they can contact you if they have any questions or concerns. (These policies are also sometimes referred to as payment plans or payment processes.)
Besides questions about making bill payments, there are a number of elements you’ll want to cover in your payment procedure—for example, whether customers can undo orders or payments, whether you accept cancellations, and what happens if the payment is past due.
Let’s dig deeper to find out what else to include in your payment plan.
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What Should You Include in Your Payment Policy?
A typical payment process document can include a variety of payment information, from applicable due dates to business bank account numbers.
Here’re the essential items to include in your policy:
1. When Payment Is Due
Clearly outline the number of days a customer has after receiving an invoice before payment is due. Explicitly state if you’ll accept partial payment upfront and whether or not you’ll require a deposit before you start work.
You typically convey the invoice due date via “Net [##],” where the invoice date plus the number of days outlined in square brackets is the payment due date. For instance, Net 10 means the customer pays the amount due within 10 days of the invoice. Similarly, a Net 30 invoice is due 30 days after the invoice date.
2. Forms of Payment Accepted
Share the common payment methods you support. Standard methods include cash, check, credit card, debit card, and ACH/bank transfer.
If you’re unsure which payment methods you should offer, consider their pros and cons. For instance, cash is easiest to set up, but it means you’ll spend more time in accounting. On the other hand, credit cards are convenient but include merchant fees, which can eat into your budget. Bank transfers tend to have the lowest fees.
3. Discount Policies
Will you offer an early payment discount? If so, you’ll want to explain that discount in your policy. A discount on early payments can encourage customers to pay you early and help maintain your cash flow. For instance, you can give customers a 5% discount if they pay a Net 30 invoice within the first seven days.
Similarly, you may offer price matching against competitors to attract more customers.
4. Late Payment Penalties
While everyone wants to be paid on time, 59% of small and medium businesses have experienced late payments.
To encourage customers to avoid late payments, you may impose penalties if you receive payment after the due date.
Many U.S. states have their own laws governing late fees—so before you start charging your customers for late payments, make sure you understand the laws in your area. For example, in North Carolina, businesses may charge $15 or 5% of the total amount of the invoice, depending on which is greater.
Still, don’t go overboard. You want to keep customers. Typically, a penalty between $15-$75 works for most businesses.
5. Invoice Policies
When will you issue invoices, and when are they due? Keeping your invoice payment terms well documented will not only help you get paid on time, but it can also be helpful in case any invoice-related legal issues arise in the future.
Now that you understand what to include in your payment policy, let’s see how to pull all these elements together and develop a clear policy for your business payments.
How To Set Up a Payment Policy
A written payment plan is the best way to avoid collection issues. You can start with the payment terms, add supported payment methods, and finally create an invoice that includes the TL;DR version of the payment plan. Let’s go into each section.
Decide on Payment Terms
PwC found it took businesses an average of 54.1 days to collect payments. However, payment terms can vary from business to business—so set payment terms that work for your business and your customers.
For instance, if you own a manufacturing firm, you may traditionally have longer sales cycles of up to 90 days. On the other hand, if you manage a landscaping business, you can expect payments within a week, given the heavy cash flow.
For a rule of thumb, here are some typical payment terms for small businesses you can follow:
- Construction: Preferably, 30 days or less. Levelset found 85% of respondents offer Net 30 or less. However, those same respondents said 61% of the time, they received payment later than 30 days. These payment terms give clients time to secure payment for the larger invoices you may be sending them. After all, they may need time to arrange external financing.
- Food and Beverage: Payment is due immediately at restaurants. With catering, you may charge a 50% deposit and collect the remaining amount a day before the event. Collecting at least some payment in advance is customary as you need to purchase the ingredients, and canceled orders typically go to waste.
- Retail: Most retailers opt for immediate payments via cash or credit card. If you offer financing, you may require the customer to pay in 30 days. The smaller purchases in retail typically mean customers already have the cash on hand, so short payment terms won’t deter them.
- Hospitality: Like retail, most hotels require immediate payments at check-in. Many hotels also require deposits to hold reservations. As with the food industry, hospitality businesses may lose income if a room is canceled, so it’s best to ask for upfront payments.
- Landscaping: Immediate payments. For longer projects, you may opt for deposits before the start of work.
- Cleaning services: For one-off projects, you may opt for a 30-50% deposit and collect the remaining at the end of the project. For ongoing work, you can opt for a monthly payment plan. Having a steady supply of regular customers is vital, so contracts for long-term customers are a good idea as well.
- Event organizers: A 50% deposit for reservation. You typically ask for the remaining payment a day before the event. These terms help cover the costs of organizing events, many of which incur before an event takes place.
If you aren’t sure what terms to set, check out your local competitors to see what terms they offer.
Also, make sure to account for late payments when deciding on payment terms. Not all bills will be paid on time, so make sure to add some padding to your terms (for example, if you need payment within 30 days, consider setting your terms for 15 days).
Select Your Payment Methods
Again, the payment types you accept will vary depending on your industry.
For instance, if you own a coffee shop, you won’t be accepting personal checks, given the risk of fraud and loss of time to process them.
On the flip side, if you’re working on a $50,000 construction job, accepting a check from a customer would make sense. (And a credit card, like an American Express card, will always be fair game, though you’ll need to pay fees most likely.)
When it comes to what payment methods to accept, typically, you can opt for:
- Cash: Restaurants, retail, and many small businesses typically deal in cash. But to avoid IRS audits surrounding cash payments above $10,000, you might consider opting for other payment methods for large transactions.
- Credit or debit cards: Payment by card is convenient for both you and your customers. Offering support for payment cards typically helps you avoid long payment periods since you don’t have to wait for a check to clear or a bank transfer to go through. Some businesses want to avoid the fees associated with accepting card payments, but the near instant payment is a nice trade-off.
- Checks: While checks made up 6.51% of the number of U.S. non-cash payments in 2020, they accounted for 22.91% of the total value, given the larger average value of payment via checks. If your business deals with large payment amounts, like in construction or manufacturing, you should probably accept checks.
- Electronic funds transfer: Electronic funds transfer (EFT) includes any electronic transfer of money, including ATM transactions and direct deposits. These online payments are the modern check alternative. In the U.S., you typically rely on the Automated Clearing House (ACH) to receive EFT payments within two business days. ACH is a financial network used to move money between banks, credit unions, and other financial institutions.
While cash is the “safest” payment type (since you literally receive the money right then and there), accepting non-cash payments is essential to reach most customers—as many customers prefer, for example, credit cards over cash.
It’s also easier to account for electronic payments, as many accounting software platforms can sync with your bank account, reducing the need to do a ton of manual math.
Define Typical Payment Procedures
Your payment plan also serves as your guide for any potential legal issues. For instance, say you’re an event organizer and a customer submitted a 50% deposit a month before their event—and then canceled two days before the event. Do you need to return the deposit?
Your payment policy needs to include detailed payment terms and procedures for any situation that might come up in your business. That way, anytime a question like this comes up, the answer is clearly outlined in your policy.
Make sure to include payment terms surrounding:
- Cancellations: How much of the deposit will you return if the customer cancels a reservation? And if it's non-refundable, make sure to call that out.
- Penalties: How much of a penalty or fine will you charge for late payments? Will there be any interest charged?
- Discounts: Do you offer any discounts for early payments or referrals?
Use Accounting Software
Once you’ve defined your payment terms, it’s time to add them to your invoice to remind customers.
With most accounting software, you can do so with a few clicks. For instance, QuickBooks lets you add both recurring and one-time terms to your invoices. You can select standard terms like Net 30 or set specific due dates. You can also set up early payment discounts.
Last but not least, don’t forget to say “please” and “thank you” on your invoice. FreshBooks found that adding these words makes your invoices 5% more likely to get paid.
Notify Your Customers About Changes
Once you’ve created your payment policy, make sure your customers are aware of it. You can post it on your website and send a copy with invoices.
You probably want to clarify when these changes in policy will take place, especially if you are notifying customers a month or so before the policy comes into effect.
You may want to have the policy apply only to new orders, while existing ones remain unchanged. For recurring charges, make sure you offer plenty of notice about any upcoming changes, especially if this will have an impact on how they pay.
Payment Policies Help You and Your Customers
While setting up a payment plan is a bit of work, it’s helpful for you and your customers. A well-written payment policy will clarify your terms to customers and explain your expectations.
Consider your industry standards when drawing up your policy. Look to the competition for inspiration and take advantage of your accounting software’s payment terms features to make invoicing easier for you.