Business

Deferred billing: What is it, and when should you use it?

Panna Kemenes

17.12.21 (updated more than 1 year ago)

Read time 2 minutes

Deferred billing is a billing method used for purchases with a delayed payment date.

With this billing method, there is a grace period within which the customer won’t have to pay for the goods or services received.

It can entice customers to make a purchase if they are only able to pay the full amount at a later date, or want to spread the cost of a purchase over time.

This post will explore what deferred billing is and how you can use it for your business.

Deferred billing definition: What is deferred billing?

When a business agrees to delay the payment due date for goods received, the business can use deferred billing. This means that the customer will be billed for the full amount at a later date, after the goods have been delivered.

This billing method grants the buyer more flexibility, allowing them a courtesy period to gather the funds for payment. Deferred billing doesn’t lead to extra finance charges for the customer if they pay the bill on time.

The business will refer to the amount due as ‘amount deferred’. The amount deferred is the money owed to the seller after the agreed-upon courtesy period is over.

Deferred billing example

Let’s say you trade on an international scale as a furniture manufacturer. You have an agreement in place with a German buyer for a custom table. You agree to bill the full amount in six weeks after delivery. The payment due date and amount due are set in the agreement.

With deferred billing, the buyer may pay for shipping, but they won’t owe the balance due for the table for another six weeks.

During this time, the customer won’t have to pay interest, either.

You send the bill out six weeks after delivery, and your customer then sends the full payment via the agreed payment terms.

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Why do businesses use deferred billing?

With deferred payments, it can be easier to sell high-value goods that have a long estimated life.

For example, furniture stores often rely on deferred billing. New homeowners want a sofa when they move in, even if they can’t afford it at the time.

The lack of interest charged is appealing to customers, and deferred payments like this won't affect a customer’s credit score, either.¹ This can make deferred billing a preference for customers over credit cards, which accrue interest.

So what’s the benefit of deferred billing for you as the seller?

In short, this type of billing can encourage buying, as the customer doesn’t need the funds upfront to make the purchase. It can also build customer loyalty and secure regular large payments. You are showing your trust in the customer to make the payment on the deferred date.

Though it does carry some risk, as you deliver the goods before receiving payment. Deferred billing is usually reinforced by a contract, though, and interest can be added if a customer misses the deferred payment date.

Deferred billing can also encourage impulse buying. This can be an unhealthy habit for customers struggling with finances.

When should you use deferred billing?

Deferred billing is best when you have a formal contract drawn up with your customer, protecting you from missed payments.

If you have long-term clients who make regular orders, deferred billing can help strengthen the relationship.

This can be particularly beneficial for customers who then use your goods to make profits themselves. Many small businesses effectively generate profit from the goods purchased to then pay the deferred bill.

Receive deferred payments from abroad with Wise Business

If you have international customers, receiving payments from deferred billing is easier with Wise Business.

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With a Wise Business account, you can have local account details in 10 major currencies. You can use a UK account number and sort code, for example, even as a US citizen. This makes it easy for UK customers to pay you, as they don’t have to stress about bad exchange rates.

Your customers can pay you in their local currency, and you can cut out the conversion fees.

The lack of costs and conversion should appeal to your international customer base. This can lead to more sales for your business.

Managing billing? You may also want to read 'How long is a billing cycle? Different billing cycles explained'

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Source:

Do Deferred Payments Affect Credit?

Source checked December 7, 2021.

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