09/ 15/ 2004
by Jim Sapp
The terms of a sale include the method of payment accepted by the business, the customer identification that is required, the length of time the customer has to pay and your return policy. These terms should be written up and posted so that they are clear to both your staff and your customers.
Method of Payment
There are usually several ways for a customer to pay for goods or services. Some companies want the customer to pay for a purchase in full at the time of the sale, while others let a customer put a product in layaway or pay in several lump sum payments. A customer may have to pay in cash, be able to write a personal check or charge the item to a credit card. As the business owner, you decide how you want your customers to pay for your product or service.
Cash
Many retail businesses are "cash only," meaning that customers must pay cash in full at the time of the sale. This method of payment is obviously best for you, as you have "take-it-to-the-bank" U.S. dollars in hand for your business growth needs.
Be careful who handles your cash. You don't want employees to steal from the company. Good deposit procedures and a balancing system of cash versus sales are necessary if you're in a retail or cash business.
Credit CardsCredit card payment is convenient for your customers, but it costs you more to offer this option. It will cost you between 1 - 4 percent of every sales transaction, plus additional credit card company fees.
Shop around for credit card services and competitive prices. Everything is negotiable. You can use a local bank for your credit card services, or check the Internet for a reputable credit card servicing company. A popular and economical processor is PayPal (www.paypal.com). One of the larger credit card processors is Cardservicesales.com. Intuit, Inc., has recently introduced a merchant account service (credit card processing) that works with QuickBooks software. For more information, visit Quickbooks.com. You can also check out buyerzone.com, which compares vendors and equipment fees. This is an excellent service worth reviewing to save you money.
Once you select a company, be certain to review the contract. Be sure you understand all the set-up fees, monthly minimums, equipment charges and processing fees. In the beginning, do not sign a long-term contract; you may need to change service providers next year.
Personal ChecksMany professionals (such as dentists or veterinarians) and service providers (such as building or IT contractors) must accept personal checks from individual customers. But I suggest that you not accept personal checks if you are in the retail business, operating something like a dry cleaners, sandwich shop or craft store. Consider accepting credit card or debit card payments instead.
About 3-4 percent of all personal checks will bounce, meaning that the check is no good. The bank will send the check back to you marked "NSF" (non-sufficient funds), which means that your customer doesn't have the money in his account to pay for your product or service. Your bank will charge a fee for processing a bad check, typically $5 to $15. You, in turn, need to charge your customer this fee plus a markup for your own administrative time, perhaps an additional $10. In many cases, though, you'll be lucky just to collect the amount of the original check, especially in high-volume retail businesses or those in which you don't get a large number of repeat customers.
If you accept checks drawn on out-of-state banks, it typically takes five to seven days for the deposit to clear. Congress has recently passed a bill that allows banks to process deposits electronically, rather than waiting for the paper check to move through the system. This should speed up the process in the future.
If you accept a check for a large payment, you should wait several days before writing checks against that deposit to pay your vendors. Otherwise, if the check bounces, it may cause you to overdraw your account, resulting in additional fees as well as embarrassment.
Payment Terms
How long does your customer have to pay for your product or service? Will you require them to pay in full at the time of the sale, or will you consider other options? Again, this is a decision you have to make before you begin selling. I have found that by establishing the terms at the time of the sale you will ensure payment. Be sure your invoice or quote form clearly states the payment terms.
Full Payment at the Time of Sale
This is the easiest way for you to collect payment from your customers for your product or service. The customer buys something and is required to pay in full at the time of the sale. Waiting for payments, or accepting partial payments, is difficult and costly for a new business.
This means the customer pays you a certain percentage of the purchase price, usually 20 - 30percent, before you order or begin production or perform the service. Down payments are very common—and usually required—for specialized products or services that are very expensive or that must be customized or ordered from another company.
For example, you own a landscaping business. A customer wants you to plant six blue spruce trees in their backyard. You will have to order the trees from another out-of-state company, and they will cost you $1,800. You plan to charge your customer $4,500 for the job. Before you order the trees, get a down payment of thirty percent of the total sale price, or $1,350.
From a business standpoint, collecting the down payment gives you cash to pay for the product. You pay for most of the trees with the customer's money—not yours. The down payment protects you in case the customer has a change of heart about the purchase.
Even if a customer ultimately decides against a purchase, do not refund the down payment, especially if you have ordered something special or spent valuable company time preparing a specialty product for the customer. You do not want to be left with something that you won't be able to sell to anyone else. Don't be afraid to ask your customers for a down payment. It will help to ensure that the customer completes the transaction and that you don't lose money.
Partial Payment at the Time of Receipt or DeliveryIn some cases, you may be unable to deliver the entire product or service that your customer is buying from you. You still must collect the majority of the payment from your customer.
For example, let's say you are a small general contractor. You remodel a customer's bathroom, installing new sinks, a toilet, light fixtures and a tile floor. The whole job will cost the customer $5,000. You complete all the work except installing one light fixture that is on backorder. You must still collect most of the payment for your work—say, $4,800. The customer can pay the balance when the light is installed.
The idea here is that you should not walk away from a job you've nearly completed without the majority of your money. Sometimes this can be very difficult, but remember, you must protect your cash flow.
JIM R. SAPP is an international business consultant and speaker with more than 25 years experience as a business owner and entrepreneur. He is founder and director of the American Small Business Institute, and recipient of both the "Entrepreneur of the Year" award and "Blue Chip Enterprise Award" for inspirational achievement in business. His book Starting Your First Business is available from www.sappbiz.com or by calling 800.570.5436.
