How to set payment terms for freelancers and small businesses?

Setting up the right terms of payments probably is not the first priority for an entrepreneur but for sure is a key priority to maintain a healthy cash flow, and to ensure long-term sustainability.

Setting up the terms of payment up front and in writing is very important to protect the sustainability of the business. Terms of payment need to be defined within the agreement and need to be very specific.

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What should the terms of payment include?

The terms and conditions should specify what service is provided when the payments are due, what happens if everything goes wrong. Terms and conditions should include at least the following elements:

  • The definition of products or services that will be provided.
  • Timelines for delivery.
  • Describe clearly the number of letters and numbers.
  • Describing when the payment is due (e.g., 7 days after the invoice, cash on delivery, at the completion of the work).
  • Describe how you want to be paid.
  • Mention if taxes are included or excluded.
  • What happens if either party doesn’t deliver or pay or wants to end the relationship.
  • What notice is required to get out of it?
  • Which law shall govern the contract (not required for some deals that happen within the same country, as this will be regulated based on local laws).

As there are no standards to set-up the terms of payment, any professional should consider the payment conditions that best fit his/her business and the current market conditions. The following is a list of tips to be considered when setting up the terms of payment:

  • Consider what are the terms of payment you want to offer.
  • Consider what are the taxes.
  • Consider what can go wrong and think about remedies.
  • Consider the customer’s perspective.
  • Ask for help from the specialist.

Let’s make an example for CCTV installation.

Type of work: Installation of CCTV.

The scope of work: Install 1 camera in each room of the villa for a total of 10 rooms, test the CCTV system and ensure that works properly.  

Timeline: The work can be completed within 3 working days

Payment terms:

  • 20% at the start of the project.
  •  80% of the delivery of the project.
  •  Payments are due within 7 days of receiving the invoice.

Taxes: Taxes are not included and will be added on top of our fee (or taxes are all included)

Payment method: payment can be made in cash or via wire transfer to (Bank Name and account details)

Variation: Any changes to the scope will be agreed and priced before being implemented

Stop/cancelation of the project: If the project will be stopped during execution, the client will pay the working days to date

Freelancers and small-medium companies need to make sure the terms of payment are agreed in writing either by responding an email or by signing a contract. This is the first rule to make sure the customers pay.

Another important rule is to issue the invoice as soon as it due and to specify on it the following items:

  • Date of the invoice.
  • Description of the work scope completed.
  • Terms of payment e.g., to be paid within 7 days.
  • Where to pay e.g., pay in cash on delivery or by wire transfer to Bank X.

 

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What happens if the customer does not want to pay?

Service providers and freelancers need to follow up on payment on a regular basis and ensure all documentation are in order. Recurring to a local court should be the last try.

Overall, our recommendation is to set clear terms of payment in writing, to make sure the terms are accepted by the client by email or in writing, to complete the work within the budget and the standards required by the client, to ensure the client sign a certification of completion, and then to follow up on payments.

Please note this is not a legal advise, but  the results of direct experience. If you need a business advisor or a legal support look for professionals on www.serviis.com.

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