Sometimes the best way to get paid on time is to forget everything you think you know. Or at least everything you think you know about optimal payment terms.
When it comes to payment terms, an entirely counterintuitive approach works best.
Fair warning: I’m probably going to ramble on here for a bit. I’m in a rambling kind of mood. So if you’re thinking, Hey man, just give me the terms and let me get on with my day, scroll down a bit. I’ve put them in ALL CAPS.
OK, here goes. The payment terms you’re using are probably “Due on receipt” or “Due in 30 days.” If those aren’t your terms, congratulations! You’re in the minority. However, most people adopted these terms long ago and never looked back. They are by far the most popular. Yet when it comes right down to it, neither one is very effective.
Consider this: When a customer gets an invoice marked “Due on Receipt,” in their minds the payment is already late. By the time they get the invoice processed and the check put in the mail, they’ve already missed the mark. So here’s what they’ll do: they’ll put off paying. I mean, if the payment is already past due, then they might as well put it aside and deal with it later, right? They will instead focus on the invoices that can actually get paid on time. You can’t really blame them. We all want to feel a sense of satisfaction in our jobs, don’t we? So we will always be inclined towards tasks that provide a sense of satisfaction, however small, versus focusing on tasks where we’re mitigating dissatisfaction—in this case, being late through no fault of our own.
On the flip side, “Due in 30 days” carries no sense of urgency at all. It’s not due until next month, so there’s no reason to even think about it until next month. As you probably know from your own business dealings, working in accounts payable is a juggling act—it’s all about prioritizing, deciding what should be accomplished now and what should be put off until later. “Due in 30 days” automatically gives your clients permission to procrastinate and focus their attention on the more urgent invoices.
Keep in mind that unless you’re billing some gigantic Fortune 500 company, most accounts payable employees have a fair amount of discretion regarding which invoices get paid and which invoices get put off until another day (or month). But the bottom line is this: you’re dealing with human beings. And like any typical human, accounts payable employees will respond favorably to being offered an opportunity to achieve satisfaction.
Okay—can you feel it? I’m finally coming to the part you’ve been waiting for. I’m about to change my font. So what payment terms work best to motivate our clients’ beloved accounts payable employees to process our invoices ASAP?
OPTIMAL PAYMENT TERMS ARE BETWEEN 14 AND 21 DAYS.
We’ve seen those terms work miracles. They offer an attainable goal—yet it’s a goal that comes with just a bit of urgency. When someone sees a bill that’s due within two weeks, they have no reason to put off paying it until next month (when it will be past due). But they also have enough time to actually get it done (ideally, today).
When companies switch their terms to “Due in 14 days,” miracles happen—or at least they get paid quicker and more consistently, which really is something of a miracle these days. But in the words of legendary Reading Rainbow host LeVar Burton: “Don’t take my word for it.”
Go try it for yourself.
Everything You Know About Payment Terms Is Wrong: Optimal Payment Terms are 14-21 Days