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Payment Comes First

Daniel Moisyeyev
Daniel Moisyeyev

Long payment periods are a serious problem for small business. The 30, 60 and even 120-day payment terms are often imposed by larger companies upon smaller suppliers and cause quite a bit of issue with cash flow. There is an effective way to fight this, especially if your company collects small payments. This is done by changing your company policy in regards to payment collection and implementing an online booking or purchasing system that requires instant online payment via VISA/Mastercard. There simply isn't any reason to provide extended payment terms for small orders with today's availability of credit.

B2C vs B2B Payment Expectations
Why are there there 30, 60 or 120-day payment terms in the first place?

In the world of B2C transactions, consumers immediately make payments for goods and services. Businesses do not (generally) give consumers credit – that is the job of financial institutions and credit providers (some larger service providers may be an exception). If a consumer can not pay for the product today with cash, it is their responsibility to source credit.

B2B transactions, however, have traditionally operated on different terms – especially when it came to large transactions. Suppliers often provide credit in the form of extended payment terms on invoices. These terms can be very reasonable (7 days) to onerous (120 days).

Having said that, many customers fail to make a payment on time and colossal resources end up being spent on chasing up unpaid invoices.
While there is still a genuine reason for long payment terms when it comes to large B2B transactions, why are there long payment terms for small orders? The “our accounts person comes in once a month” excuse is a bit of a joke with today's access to credit and digital payment capabilities; a bank account with a VISA/Mastercard number isn't hard to obtain.
A change is needed.

As technology allows us to pay easier and more conveniently, there isn't any reason why the principle of collecting payments for goods and services in advance can't be carried over to the B2B world.

Key Reasons to Collect Payments In Advance
Some important reasons today to collect payments in advance:

1. Digital Progress
Developments in the digital space now allow any business to afford to implement a convenient online payment solution.

2. Insurance against Business Insolvency
The tough economic conditions have sent many businesses that appeared successful and worthy of supplier credit to the wall. An unsecured creditor with a small invoice will have little chance to recover the funds owed.

3. Debt Collection
Recovery for debts owed on small invoices are notoriously hard to enforce. Legal costs and time will render the whole recovery exercise pointless.

4. Cash Flow
It's much easier to keep up payments to your own suppliers when your customers have already paid in advance. You can avoid being stuck in a loop - chasing your customer for payment, after your suppliers in turn chase you for payment for materials that were used to service the same customer that is failing to pay!

5. Insurance against Price Movements
Long payment terms can expose your business to price movements by your suppliers and currency. By the time your business receives payment, the overall business operating conditions may change!

How to Collect Payments?
The best method is the same bulletproof approach as what is applied to the B2C world. The solution is to implement an online ordering/service booking facility that will demand for payment once an order is placed by the customer. A well designed ordering system will completely automate the process – thus saving on labour costs and making your business process more streamlined and professional.

The general method to collect online payments is via a VISA/Mastercard payment. The transaction is processed by an external payment gateway (or collected and processed immediately via a gateway provided by your financial institution).

Alternate payment methods can be provided (e.g. EFT), however it will take the automation factor out and the customer may still need to be chased to finalise the order.

VISA/Mastercard Fees and Chargebacks
There are two main issues that will affect your business if you rely on a large proportion of your customers paying by VISA/Mastercard:

1. Fees
While an EFT payment on an invoice is free of fees, a VISA/Mastercard payment incurs a surcharge, as well as other transaction costs imposed by your payment gateway. There isn't a simple solution – the costs of your products and services may need to be adjusted to account for the increased cost. However, the time saved chasing customers for outstanding invoices usually makes up for the increase in transaction costs.

2. Chargebacks
Chargebacks are a more serious issue that needs a careful approach and due diligence. With VISA/Mastercard payments, there is always a risk that the client will trigger a chargeback for whatever reason (e.g. in error or fraud). This effectively involves a reversal of the transaction in question and will generally result in funds being taken out of your account. Dealing with chargebacks can be difficult as the buyer has a bit more weight in the process than the merchant – chargebacks are difficult to dispute, even with complete documentation that supports the merchant. It is very important to fully document the customer information and purchase order, delivery of goods if applicable – e.g. dispatching goods by courier that requires a signature on receipt, and any other interaction with the client when dealing with VISA/Mastercard payments.

It's crucial to implement a payment policy that minimises risk – always do your due diligence before accepting a large payments by a credit card. Keep credit card payments limited to small amounts when dealing with new and untrusted clients. Chargebacks may be tricky to resolve, but they are still easier to deal with than serving a Statement of Claim to a client in default.

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