Payment Terms Management – How to Shorten Payment Terms

Long payment terms are a curse for Finnish SMEs. According to Statistics Finland, the average payment delay from the agreed due date is 8 days, meaning that with a 30-day payment term an invoice is actually paid only after 38 days. With large corporations the situation is often even worse. This ties up capital, slows growth, and increases financial stress.

The Impact of Payment Terms on Cash Flow

Every extra day in payment terms ties up working capital. If your monthly invoicing is EUR 100,000, each additional day in payment terms ties up approximately EUR 3,300 in capital. Ten extra days means EUR 33,000 missing from your working capital.

As an entrepreneur, I have experienced this firsthand. When I started a marketing agency, I unreservedly accepted clients' demanded 60-day payment terms. After the first six months I realised I had over EUR 100,000 tied up in receivables while struggling to meet payroll. Active payment terms management changed the situation completely.

Finnish Law on Payment Terms

In accordance with the EU Late Payment Directive, Finland has clear regulations on payment terms. In business-to-business trade, the payment term is generally a maximum of 30 days from the invoice date or receipt of goods. A longer payment term can be agreed, but it must be reasonable and not unfair to the creditor.

Strategies for Shortening Payment Terms

1. Negotiate Payment Terms Before the Contract

The best time to negotiate payment terms is before signing the contract. Once the work is done and the invoice sent, your negotiating position is considerably weaker. Always include the payment condition in offers and contracts. Be open: explain that a prompt payment term enables competitive pricing.

2. Early Payment Discounts Speed Up Payments

An early payment discount is an effective way to encourage fast payments. A typical condition is '2/10 net 30': the customer receives a 2% discount if they pay within 10 days, otherwise the full amount is due at 30 days. Although 2% sounds small, annualised it corresponds to approximately 36% interest – yet it can still be worthwhile if the alternative is a 30-day additional wait.

3. Invoice Immediately

Surprisingly many SME entrepreneurs delay invoicing. Every day you wait to send an invoice is an additional day waiting for cash. Automate invoicing so that the invoice goes out immediately upon completion of work or delivery. For large projects, use interim invoicing – do not wait for the entire project to be completed.

4. Automatic Payment Reminders

Set up automatic reminders in your invoicing software. Good practice is to send the first reminder 3 days before the due date, the second on the due date, and the third 7 days after the due date. Automation removes the personal awkwardness and ensures no overdue invoice goes unnoticed.

5. Check Clients' Credit Ratings

Before granting payment terms to a new client, check their credit rating. Asiakastieto and Bisnode provide comprehensive credit data on Finnish companies. Clients with poor credit ratings should be required to pay in advance or given shorter payment terms. This is not a sign of distrust – it is professional risk management.

What to Do When a Client Does Not Pay?

Even if all preventive measures are in place, sometimes clients do not pay on time – or at all. An effective collection process is systematic and swift.

An important rule of thumb: the sooner collection begins, the better the chances of recovering the money. According to the Federation of Finnish Enterprises, the collection rate for receivables over 90 days old is below 50%, while over 90% of receivables under 30 days old are collected.

Invoice Financing as a Solution for Long Payment Terms

Sometimes a client's payment term simply cannot be shortened – especially when the client is a large organisation or public sector entity. In these cases, invoice financing offers an effective solution. You sell the invoice to a finance company and receive 80–95% immediately. This way you can offer the client their desired payment term without your cash flow suffering.

In my experience, invoice financing has been particularly useful with large project invoices. When a EUR 50,000 invoice has a 60-day payment term, the 1.5–2% cost of invoice financing is a small price for immediate liquidity.

"Payment terms management is not just financial administration – it is a strategic competitive advantage. A company that controls its cash flow can invest in growth while competitors struggle with their liquidity."

Summary

Payment terms management is one of the most effective ways to improve a company's cash flow. The key elements are clear payment conditions in contracts, prompt invoicing, automatic reminders, leveraging early payment discounts, and a systematic collection process. When your own measures are not enough, invoice financing offers an effective way to convert long payment terms into immediate liquidity.