How to secure upfront payment terms

Upfront payments are the gold standard for cash flow management. A customer pays upfront either fully or partially for the product or service required. There’s no waiting around or complex credit agreements, just cash in the bank. While you can’t expect upfront payments from every customer all the time, there are certain scenarios where they make a big difference. 

In this article, we highlight when and how to use upfront payments, as well as how you can negotiate and improve your payment terms to improve cash flow and simplify your finances.

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What is an upfront payment?

An upfront payment is when a business collects payment (either in full or with a partial payment) before they’ve delivered the service or goods. Sales contracts will often include upfront payments, and the supplier and their customer will negotiate payment before the supplier agrees to take on any work.

We discuss how you can secure upfront payment terms from your customers below.

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When should you ask for an upfront payment?

While flexible payment terms are a valuable way to build relationships with your customers, there are certain scenarios where upfront payments me be advisable, or essential. 

• New Clients: When dealing with new clients, asking for an upfront payment can help mitigate the risk of non-payment. This initial transaction builds trust and establishes a financial commitment from the client, ensuring they are serious about proceeding with the project.
• Large or Custom Orders: For large-scale or custom orders, upfront payments cover the cost of materials and initial labour. This practice prevents your business from bearing the entire financial burden of an extensive project, ensuring you have the necessary funds to deliver the work.
• High-Risk Industries: In industries with higher risks of default or non-payment, such as construction or creative services, securing an upfront payment protects your business from potential financial loss. This is particularly important when the work involves substantial initial investment.

Long-Term Projects: For projects that extend over a long period, an upfront payment ensures that you have the necessary resources to commence work. This approach also helps in maintaining a steady cash flow throughout the project's duration, allowing for smoother operations.

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How to secure upfront payments from customers

It pays to start early when securing upfront payment terms with your customers. In fact, you should try to get into the habit of talking about it when first discussing payment arrangements. That way, it won't come as a surprise if you try to change your contract at a later date.

Some tips for when you’re asking for upfront payment terms

• Understand that your customers need time to pay and might be waiting on suppliers themselves
• Offer customer financing, allowing your customers to pay upfront or spread the cost over 3 monthly instalments (while you get paid upfront)
• Send automated email reminders to prompt customers when it’s time for them to pay (but don’t spam them)
• Use accounting software like Xero (with iwocaPay integration) to track overdue payments and offer new solutions - such as customer financing

The benefits of upfront payment

There are many benefits of receiving upfront payments. These include:

• better cash flow: by securing upfront payment terms, you’ll be able to project cash flow and cover expenses more confidently
• less risk: your business will be in a better position to pay staff on time, settle bills and weather any unforeseen difficulties
• boosted credit rating: with a positive cash flow, your credit rating will also improve, which is great for your finances and your brand reputation
• more protection: by receiving payments upfront or in instalments, you won’t stand to lose all the money for your work if the business you're dealing with goes under before you’ve completed it.

If you use a payment solution like iwocaPay, you won’t have to worry about losing business due to failed negotiations. Your customers can choose to pay upfront or across three monthly instalments, and you’ll be paid upfront every time. It’s a win-win.

The difference between an upfront payment vs a down payment

An upfront payment  – as above – is one that you’ll receive before you’ve done any work or delivered any goods. A down payment is different. Take a look at these comparisons between upfront payments vs down payments:

Percentage: upfront payments can total the full amount, whereas a down payment is usually a portion of the price.

Usage: down payments secure a service or goods for the buyer, and upfront payments help to minimise credit risk for the seller.

Amount: suppliers will often use down payments when selling expensive items, while upfront payments can be used for most types of payments.

Collecting upfront payments

There are lots of different payment methods for businesses to consider when collecting funds from customers. These range from bank transfers to card payments, direct debit, or cash.

Offering customer financing is our favourite option when collecting upfront payments. You can collect payments in just two clicks, so there’s no need to provide a bank account number or ask for card details.

Meanwhile, customers can spread payments while you get paid upfront. So, you won’t need to worry about negotiating favourable terms - making both parties happy.