Are Your Payment Terms Secretly Hurting Your Business?
Extending payment terms to 30, 60, or even 90 days might seem like a smart way to attract clients and keep sales flowing smoothly, but beneath the surface, these terms could be draining your business more than you realise.
Let’s uncover how these “invisible loans” to your clients may be costing you, and how to take back control of your cash flow.
“Beware of little expenses; a small leak will sink a great ship.” – Benjamin Franklin
The Hidden Cost of Extended Terms
When you agree to delayed payments, you’re not just being flexible, you’re effectively lending your clients money. By supplying goods or services now and receiving payment weeks (or months) later, you’ve provided an unsecured loan without charging interest.
This “loan” comes with real costs:
Higher working capital requirements: Your cash is tied up in accounts receivable instead of available for daily operations.
Increased borrowing costs: If you take out loans to bridge the gap, the interest becomes an indirect cost of your payment policy.
Lost opportunity: Cash that’s locked away in unpaid invoices can’t be used to invest, expand, or reduce debt.
Over time, routinely extending credit to clients can quietly erode your margins, limit agility, and strain growth, especially in industries with tight cash cycles.
But how do you protect your finances without pushing away customers who expect these terms?
Here are some smart, sustainable strategies.
1. Treat Payment Terms as a Priced Service
If clients want longer to pay, that flexibility should have a price tag.
You can:
Add a clear financing fee for extended terms (e.g. 60 or 90 days).
Publish two price lists, one for immediate payment, and one for deferred payment.
This approach keeps costs transparent and allows your finance team to model returns more accurately.
2. Offer Early-Payment Incentives
Instead of offering unconditional long terms, encourage faster payments with small, predictable discounts.
For example, offering a 1% discount for payment within 10 days can convert receivables into near-cash, often at a lower cost than financing.
These incentives benefit both parties, your client saves money, and you improve liquidity.
3.Formalise Credit Control
Stop leaving credit decisions to chance. Implement formal credit applications and limits tied to payment history.
Review client credit performance regularly.
Restrict higher-risk or new customers to shorter terms until they build trust.
Use staged deliveries or deposits to limit exposure.
A structured credit policy keeps risks visible and manageable.
4. Make Terms Part of the Negotiation
Payment terms shouldn’t be an afterthought, they’re a lever in your commercial negotiations.
Trade flexibility for commitment. For example:
Offer longer terms in exchange for volume guarantees or longer contracts.
Use partial upfront deposits to secure cash flow early.
This approach keeps clients happy while reducing your financial risk.
5. Use Technology and Finance Tools
Modern finance tools can make all the difference.
Send invoices electronically and enable one-click payment options.
Use automated reminders to reduce delays.
Explore invoice financing or supply-chain finance to turn receivables into cash sooner, often at a lower cost than traditional borrowing.
6. Make the Invisible Visible
Treat extended payment terms as a real, measurable cost.
Your accountant (that’s us!) can help you calculate the financial impact by tracking:
The cost of financing the delay,
The risk of bad debts, and
The return lost on idle cash.
Regularly including this data in your monthly reports makes it easier to make strategic decisions around cash flow and client terms.
The Bottom Line
Payment terms are more than just a line on an invoice, they’re a financial instrument that can either support or sabotage your business.
By pricing credit fairly, encouraging early payment, and tracking the real cost of delayed terms, you can protect your cash flow and strengthen your company’s long-term stability.
If you’d like help restructuring your payment terms or modelling their impact, speak to us, we’ll help you turn your cash cycle into a strategic advantage.