Amy Hardison White

Are payment plans a good fit for your business?

We’ve talked a lot about different ways to collect on invoices recently - from general strategies on preventing late payments, to more specific recommendations on dunning management and invoicing factoring & financing. There’s one option that comes up frequently as a page in the collections playbook: payment plans.

A payment plan is just what it sounds like: a detailed plan to make payments on existing debts. Payment plans are widely adopted in certain sectors, like the auto and mortgage industries, and for college tuition payments. These are very expensive, critical purchases that customers would not be able to make without a payment plan option.

So maybe your products and services are much more affordable than cars, houses, and college courses. Why might you decide to use payment plans for your business?

  • Your business offers a product or service that customers must have, but is out of their spending capacity. Given all the expenses associated with our modern lives, it doesn’t take much to push a critical item out a consumer’s budget. The Internal Revenue Service (IRS) promotes payment plans to make tax payments. Law firms like Immigrant Law Group provides payment plans to pay back costly legal fees. And the list goes on.

    Think about your products and services. Are they “nice-to-have” or “must-have” for your customers? If they fall into the “must-have” category and you frequently have difficulty getting paid on invoices, it might be time to consider payment plans.

  • Credit card financing is not an option. Many retail businesses use credit financing at the point of sale to reduce the need for payment plans. In these cases, the customer’s only option is to apply for financing, and their likelihood of being accepted is low due to stringent lender requirements.

    But for your business, maybe credit financing isn’t available. You may prefer not to take on the cost of providing it, or you know it is unlikely that a significant percentage of customers would be approved. In this case, you might decide to offer payment plans in lieu of credit financing.

  • Payment plans are only used on an exception basis. Let’s say you’ve taken a hard look at your products and services and current credit financing, and you opt not to offer payment plans to all customers. You can still use them for one-off situations. Maybe you have one or two long-time customers who are delinquent. You’ve made multiple attempts to collect with no results.

    Instead of passing the debt off to a collections agency or writing it off as bad debt, you could work with each customer individually to create a payment plan. It may help preserve your relationship with that customer for the long-term, when they are able to make on-time payments again.

However you decide to offer payment plans, protect your business by being as clear as possible with customers from the start. *Give customers detailed terms up-front, including important items like the total fee, the duration of the plan, payments broken down by increment (i.e., monthly in many cases), and any rewards or penalties that customers can incur during the plan. Discounts for early payments and additional fees for late payments can go a long way towards incenting the behavior your want.

Regularly communicate with customers regarding the status of upcoming payments. Send reminders before payments are due, on the due date, and after the due date. If there’s a discount for early payment or penalty fee for late payment, include it in the reminder.

Decide on a level of flexibility, and stick with it. There are going to be times when your best efforts to give customers payment options go awry, and invoices remain unpaid. Plan for what you will do at these times. Will you call the customer and work out a new set of terms? Will you write it off as bad debt and restrict access to products and services (if possible)? Only you can decide. But before you get into this situation, have a plan to follow. Even if you diverge from that plan, you’ll have something to start with.

Payment plans are a great strategy in the accounts receivable toolset. They aren’t a fit for all businesses, but don’t dismiss them too quickly. They are an effective way to give customers flexible payment options, without the cost of outside agencies.