496: Managing Payment Terms For Your Construction Business Clients

This Podcast Is Episode Number 496, And It's About Managing Payment Terms For Your Construction Business Clients

Getting paid correctly and on time by customers can be a constant frustration for business owners. Communicating your terms is the best way to ensure you aren't out of pocket – or are left chasing debtors.

Investors, developers, and shrewd business people designed the most popular method - those who understand the concept of divide and conquer - it is when contractors get little or no down payment for a construction project, do all the work, including change orders, and then try to collect their money.

What often happens is that contractors hate paperwork preferring to keep everything in their heads. Then when it comes time to collect their money, they have to re-sell the job and talk their customer into parting with their money.

Contractors who finance working capital with their own money and whatever they can borrow will earn less profit and put themselves at a higher risk of failure than contractors who use Other People's Money (O.P.M.).

The importance of setting your terms of payment

Your payment terms let clients know when and how you expect to be paid. Setting your terms and letting your customers know your expectations gives you better control over your business and a valuable platform for resolving potential payment issues.

Remove barriers to sale

Setting payment terms shouldn't discourage regular or new customers from doing business with you – there are advantages to giving clients several options.

Encourage clients to hire your services and remove barriers to the sale by making the purchase as easy as possible through a variety of ways to pay, including:

Mobile payment options. Cash or check. Bank deposit. Online money transfers to your bank account Debit or credit card payment.

Take the time to become familiar with all these options and their relative pros and cons.

You might, for example, decide to accept only major credit cards, offer a discount for cash, or give your staff leeway to negotiate cash discounts if customers request this.

Know your industry's norms

It's worth researching your industry's generally accepted payment terms and terms competitors use. This doesn't mean you have to follow suit. You may be able to spot a gap or opportunity to be more flexible. The following examples could build a competitive edge:

Feature more payment options than most competitors. Provide quicker and easier ways to pay. Offer a discount for cash deals that give you immediate cash flow and protect you from credit payment defaults. Offer longer payment terms in return for a slightly higher price. Investigate faster and more convenient ways to pay using the latest smartphone technology. Offer variations for payment

There are numerous terms you can set out for your customers to pay. Sometimes it's best to use a method that works for you both.

Payment in advance

Some businesses, such as those operating over eBay or other auction sites, require payment in advance to protect against possible online fraud.

Customers first pay the purchase price (including shipping costs). You then wait for the payment to clear before supplying your services.

Although this might not work for your type of business, still be wary of relying on a bank deposit or email confirmation not sent directly from the depositing bank as proof of payment.

Progress payments

These can be useful when working on a lengthy project, such as building a house or a massive remodeling project.

Progress payments serve two critical purposes:

1. They provide a regular cash flow to pay running costs.

2. They protect you against total loss if your client goes bust.

Standard practice is to build progress payments into contracts based on measurable milestones.

Early payment discounts

Early payment discounts can encourage people to pay on time. They're more useful on higher-margin services as the deal will have less impact on your profits than thin-margin products.

For example, if you offer clients 60 days of credit, consider a 5% discount for payment within 30 days.

Some clients will try to claim discounts after the due date. If you don't stick to them, your customers won't either. It's in your interests to politely but firmly point out your terms of trade.

Contracts and debit orders

Businesses that offer regular services, such as plumbing maintenance, can benefit from offering customers a set annual (or longer) contract. The attraction for the customer is a price that's typically lower than paying for each visit or service.

Requiring the client to set up a debit order eliminates time chasing payments. Spreading the cost over 12 monthly payments can also make it easier for them to manage their budgets. Meanwhile, your business benefits from a regular cash flow.

Selling on credit

Selling on credit terms can expose your business to delayed payments or outright loss, affecting your cash flow. Some rules to help you include:

Developing or adapting a credit application form – your bank manager can help. Asking customers for business references and permission to do a credit check. Setting agreed on credit limits. Clarifying your payment terms – 30 days or 60 days are the most common. Explain any interest charges you'll impose on late payments. Getting your customer to sign acceptance of these conditions to prevent future arguments. Monitoring any overdue payments or orders that will breach agreed credit limits.

Choosing your payment terms

By now, you'll have a sure idea of payment terms that could suit your business. Run your choices past your accountant, bank manager, and lawyer for their input.

Remember that your terms should attract clients, not turn them away. You might lose sales if you don't accept credit cards or add a surcharge for credit card payments. In this case, weigh the extra costs of accepting credit card payments against the business you might otherwise lose. It's your decision.

Communicate your terms to customers

Whatever your payment terms are, clearly communicate these in your terms of trade, website, and business materials.

Final thoughts

There are many accounting and invoicing software platforms and invoice templates out there that you can use. As a reminder, billing your clients depends on your signed contract, and sending invoices is based on this agreement's details. Again we recommend you hire a reasonable construction attorney and have that person write your contracts. Depending on your business needs, we can always help a little or a lot.

About The Author:

Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits to put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com