Understanding Credit Terms Basics

Home services can add up, and not all clients can afford to pay their bills upfront. Requiring payment in full would severely limit your business prospects. This is where credit terms come in.

What are credit terms?

Credit terms refer to the agreement you make with a client on when payment for services is due. Instead of requiring full payment immediately, they can space out payments over an agreed timeline.

Think of it like a credit card or customer financing. Your client agrees to pay you within a set payment term and will incur late fees if they don’t pay on time.

Credit terms should always include the following:

• Payment due date. Specify when the payment is due. Common payment terms include “net 30” or “net 60.”
• Discounts. If you offer an early payment discount, explain exactly what it is. For example, clients receive 10% off if they pay in full within 15 days. 
• Late fees. If a client makes a late payment, what type of extra fee will they incur? For example, charge an extra 5% on outstanding payments after 30 days. Late fees can also be a flat rate instead of a percentage. Send payment reminders if payment isn’t received on time to help reduce accounts receivable.
• Deposits. Larger projects often require a deposit before any services begin. This is often a percentage of the total cost.
• Cancellation fees. Many home service providers charge a fee for cancellations. Always outline your terms of service and additional fees. Clients should understand how canceling or altering a project affects payment terms.

Credit terms vs payment terms

“Credit terms” and “payment terms” are often used interchangeably, but here’s how they differ:

• Credit terms refer to when a home service provider extends credit conditions to a client. There is no immediate payment. Payment is made after services are completed.
• Payment terms refer to general terms and conditions regarding payment for services. They specify when payment is due and how to pay it. Refer to your payment terms to collect prompt payment from clients.

Payment terms can include credit terms. Credit terms are specific and only refer to situations where credit is available.

What credit terms can you offer to clients?

There are different credit terms you can offer clients. You can stick with one option or change the offer depending on the situation. It all depends on your business model and what you can afford to do.

Common options for net payment terms are “net 30” and “net 60.” These mean the client has 30 or 60 days to make all payments, respectively.

You can also offer early payment discounts alongside net terms. This ensures partial payment up front, with a specific deadline for the rest of the payment. 

Depending on the types of services you offer, you can consider the following credit terms:

2/10 net 30	The client receives 2% off the total cost of services if they pay within 10 days, or pay the full cost within 30 days.
2/10 net 60	The client receives 2% off the total cost of services if they pay within 10 days, or pay the full cost within 60 days.
1/10 net 30	The client receives 1% off the total cost of services if they pay within 10 days, or pay the full cost within 30 days.
2/15 net 30	The client receives 2% off the total cost of services if they pay within 15 days, or pay the full cost within 30 days.
2/10 net 60	The client receives 2% off the total cost of services if they pay within 10 days, or pay the full cost within 60 days.

Early payment discounts can be used to upsell services or increase marketing efforts. They help you remain competitive and attract repeat customers. Longer payment terms help manage cash flow, but they will depend on your specific needs.

Why are credit terms important?

Offering your clients credit terms has many positive benefits.

Manage cash flow

Offering credit terms helps with cash flow management. Instead of waiting on payments to come in, you can expect smaller payments over time. Payment gaps cause various issues, and large payments all at once can be difficult to balance. Scheduled payments make accounting easier and less stressful.

Build trust with clients

Extending credit terms shows clients that you trust them to pay you on time. They also trust you to provide a simple credit policy in exchange for services. Flexibility is key for building trust and establishing a loyal client base.

Increase your sales

Some clients are hesitant to book services because they can’t afford the total cost up front. Offering credit terms allows them to make payments over time, which is easier to budget for. This flexibility leads to more sales and repeat customers.

Remain competitive in local markets

If your competitors in your service area offer credit terms, you should too. Otherwise, potential clients are more likely to book services with them instead. If possible, find out what your competition offers and match or exceed their terms. This is a great way to gain an edge over them.