How To Get Your Customers To Pay In Advance

There are three ways for you to get your customers to pay in advance of you supplying the goods and services:

  • Ask them.
  • Tell them.
  • Make it a condition of how you do business.

The first (ask them) is a polite request and you may be surprised how readily they agree if you give a reason why.

“We ask for payment in advance because, as a small business that gives you personal attention, we can’t get good credit terms from our suppliers.”

Don’t be ashamed of being a small business. Make it a benefit you are proud of.

The second (tell them) is a negotiating stance.

“We need a payment of 50% of the order value to confirm commitment to the order. Unfortunately in the past we have accepted business from a very well known company, placed orders on the back of that commitment and had our order cancelled because of big-wig politics, costing us thousands to settle our claims from our suppliers.

So now we minimise our risk by getting a good proportion of our costs paid upfront.”

The third (make it a condition of business) is black and white – either they give you money in advance as a sign of good faith and commitment to the relationship… or you don’t do the work.

You Are Worth It

Too many small business owners are scared of losing the business and wimp out on both pricing and payment terms.

It’s a mindset issue and you need to understand your power in the deal.

Any commercial transaction only happens if:

The buyer is getting something more value than the price being paid.

The seller only goes into the deal if the money being received is more valuable than the product or service being traded.

Think of it like a set of balancing scales.

Value is greater than price?

Buy

Value is less than price?

Don’t buy

So the buyer is most interested in what he or she is getting for the money – the money is of secondary importance and especially if it is not their own money.

You as a small business owner sees the money as the big part of the transaction and especially as it will effectively become your money (or at least the profit element will).

So you are ultra-sensitive on the money – the price and payment terms – and you can easily project that sensitivity to your customer.

The buyer has shown by agreeing to the deal that you are worth the money so don’t wimp out.

But The Buyer Asks For A Lower Price And Delayed Payment

Yes of course they do.

It is better to get a discount than pay full price.

It is better to pay later than to pay sooner.

It’s just a negotiating stance to see how easily you will crumble and give away your profit and cash flow.

Remember, what they are getting is more important than the money – otherwise there is no deal.

But My Competitors Give Credit

Good for them.

They are obviously nice, generous people willing to borrow money to finance their customers and clients.

If the only difference between your product and service is the payment terms, then they win.

Payment has become the order winning  competitive advantage.

But if you can’t establish a better basis for a customer preferring you than delayed payment, you’ve got problems and need to be going through Pillar 3 Your Market Position.

If Cash Payment Terms Matter That Much To Your Customers…

What type of business really cares about payment terms?

One that has big financial problems and is having to scrimp and save every penny to keep making the payroll.

Two thoughts:

  1. Is that the type of customer you want to be attracting?
  2. Will you be paid 60 or 90 days after you’ve completed your end of the deal anyway?

You are better off not selling than setting yourself up with a customer who won’t or can’t pay you.

Incidentally if you don’t get any price pressure and you’re selling on credit, you need to be asking yourself if they have any intention of paying you.

Finding The Right Balance

The payment terms will vary from situation to situation and the more cash you ask for, the more credibility you need to have to back up the request.

A customer who pays 100% upfront will want to understand what happens if you don’t deliver your side of the bargain. Guarantees and overwhelming proof from testimonials are important.

Other times a part-payment as a sign of commitment may be a fair allocation of the risks of the deal.

Other times you may be happy to negotiate fast payment rather than payment in advance.

For many years I sold my consultancy services on 7 day terms because I needed to do the work to know how long it would take and therefore how much to charge. I made it clear from the start. No payment and the work stopped and I made that clear.

Return to P1M6 From Profit To Cash

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