Navigating MSP Payment Terms: Best Practices for Client-Focused Solutions

According to statistics from Get Balance, 57% of payments to small businesses were late, and 17% weren’t collected until more than a month later in 2020.

A 2022 survey from Atradius reports that 25% of B2B companies were setting shorter payment terms for clients that trade on credit, reflecting an increased concern for default payment risks.

Considering the prevalence of late B2B payments, this concern is warranted. 

By 2023, Atradius found that the average B2B payment terms were a week shorter than in 2022 — now averaging 35 days from the date of invoicing. 

However, the electronics/ICT sector (where MSPs also fall) was an outlier. To increase sales and remain competitive, this sector’s payment terms average 53 days.

Interestingly, the 2023 Astradius report also found that late payments most affect the electronics/ICT sector, citing client liquidity issues as the leading cause.

All of the evidence suggests that establishing and customizing payment terms is good practice and a strategic imperative for both MSPs and their clients. 

However, a balance between flexibility and enforcement is needed for these payment terms to be favorable to both parties.

In this article, we will focus on the most common issues MSPs face in achieving this balance and also review strategic approaches for fine-tuning MSP payment terms.

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11 Common Challenges in MSP Payment Terms

We will review the challenges involved before exploring strategies to tailor MSP payment terms.

These challenges can strain client relationships and disrupt business operations if not proactively managed.

1. Clear Communication

Communicating clearly and transparently with clients about billing and payment schedules is challenging for some MSPs. 

If MSP payment terms and expectations are not explicitly understood, disputes and other issues will happen.

For instance, an MSP might have agreed to charge a client a monthly rate in return for IT support services.

If the MSP has not adequately communicated the scope of the service package, the client might assume it includes things that are not, in fact, included in the price.

Depending on your services, this could be after-hours emergency support your client thinks is included in their regular fee.

When these additional services aren’t detailed upfront and are billed separately, the client might be unpleasantly surprised when they receive their invoice at the end of the month. 

This can result in MSP payment disputes that cause friction, disrupt cash flow, and even damage the trust needed for a long-term business relationship.

2. Misaligned Expectations

Misaligned expectations, including how and when a client will pay, often cause friction between MSPs and their clients. 

For instance, an MSP might assume a client understands they will pay on NET 30 terms — meaning a payment is owed 30 days after the invoice is issued. 

However, the client plans to pay quarterly because that’s how their cash flow cycle operates, and they assume this is within their rights.

These discrepancies are often the result of miscommunication or assumptions. 

Clients might feel free to withhold payments without clearly communicated terms because they believe they have not violated the agreement's terms. 

This leaves you waiting for payment and dealing with possible financial strain.

3. Contract Ambiguity

Ambiguous or poorly worded payment clauses can create confusion, leading to disputes about payment terms and resulting chargebacks. 

These can be especially problematic for services that vary in scope or volume. This includes cloud storage or cybersecurity monitoring, where usage may vary monthly. 

Suppose your client pays $5,000 using a credit card and files a dispute two weeks after the payment is processed.

The client claims they misunderstood the agreement and asked their card-issuing bank to reverse the transaction. 

The bank deducts the $5,000 from your account, reversing the transaction in what is known as a chargeback.

You may have already incorporated that $5,000 into your budget, and now you're unexpectedly short and struggling to meet your financial obligations. 

Beyond losing the $5,000 in revenue, you're also responsible for chargeback fees.

Depending on your payment processing service, these range between an average of $20 and $100 per transaction. 

For this example, we'll use a chargeback fee of $75.

Assuming you also paid 3.5% in credit card processing fees, this amounts to an additional $175. Even though the bank reverses the payment, you are not reimbursed for these fees.

In this scenario, your total loss amounts to $5,175 plus a $75 chargeback fee, resulting in your MSP being out a total of $5,250.

4. Adapting to Client Cash Flows

Synchronizing payment terms with clients' cash flow situations can also be difficult.

For example, clients might have seasonal revenue fluctuations and struggle to make monthly payments during their off-season. 

If you rigidly enforce standard monthly payment terms, this could strain the client relationship and even lead to contract termination.

On the other hand, being overly flexible with payment terms also has its risks. 

If you are too lenient with your payment terms, your clients may lack the urgency to pay on time and take advantage of your flexibility. 

If you budget with rigid payment terms in mind, having clients consistently pay late or miss payments will impact your MSP's cash flow and overall financial health.

5. Technology Integration

Integrating payment systems with other business management tools can be a significant obstacle in collecting timely payments. 

Some MSPs use different platforms for service management, customer relationship management (CRM), invoicing, and payment. 

If these systems cannot integrate, they can result in inefficiencies like late invoices or payment tracking errors.

For example, if you don’t integrate your billing system with your service management platform, you must generate invoices manually.

This costs time and financial resources and increases the chances of human error. 

According to research from Ardent Partners, manually processing invoices can take up to 80% longer than automated invoicing.

A special report from the Institute of Finance & Management (IOFM) also found it costs an average of $16 to process a manual invoice versus just $3 for an automated invoice.

6. Late Payments

Late payments affect nearly every industry, creating operational problems for MSPs and threatening their ability to make payroll or other financial commitments.

Suppose an MSP relies on one major client's payment to cover their monthly expenses. 

If that client is late with payments, the MSP might need to take out expensive short-term loans or dip into reserves, damaging the MSP’s bottom line.

Tackling late payments demands strong enforcement regimes, which we will discuss later in this article.

Information from MSP Insights reports that 81% of MSPs regularly experience payment delays and that it takes an average of 60 days to receive delinquent payments. 

A US Bank study also reveals that cash flow problems are the number one reason why 82% of small businesses fail. 

Not surprisingly, 72% of MSP owners report cash flow as a consistent concern.

7. Scaling Payment Systems

Growing your MSP means scaling your payment system as well. This can be difficult while maintaining service quality and client relationships and adapting payment terms to a growing client base. 

Let’s suppose you are an MSP who is expanding your client base to include larger enterprises. 

You may need to offer more sophisticated payment arrangements, such as tiered pricing based on service levels and subscription-based billing.

Scaling payment systems may also require moving from a manual invoicing process to an automated system. This move allows for greater payment volumes and more complex invoice processing. 

A system that cannot adapt accordingly will lead to late invoicing and, ultimately, late payments.

8. Automating Payment Processes

Some MSPs struggle to implement automated payment processes that align with existing payment terms and conditions.

For example, an MSP may use automated invoicing to reduce the chances of invoicing errors or to speed up payments.

However, if the system isn’t set up to handle specific client agreements — say, four payments spaced out over several months or a discount for paying early — billing errors could occur, frustrating clients and delaying payments.

9. Client Education on Terms

To avoid disputes and delays, you must overtly explain your payment schedules to clients. 

Let’s assume you invoice a client using the 'NET 30' payment term. This means the payment is due within 30 days of the client receiving the invoice. 

If the client is unfamiliar with the term ‘NET 30,' they may not understand the urgency of the payment.

Along with resulting in late payments, subsequent late penalties can also strain client relationships.

Other commonly used payment terms you may need to clarify with clients include:

• 1MD: A payment credit for a full month of service or supply.
• NET 60: Payment is due within 60 days of invoicing.
• CND: Cash Next Delivery, payment due upon receipt of goods or services.
• EOM: End of Month, payment due at the end of the month following invoicing.
• Upon receipt/COD: Payment is due immediately upon receipt of goods or services. Or also known as Cash on Delivery.

These 10 challenges demonstrate why MSPs and their clients can struggle with payment terms, often leading to delayed payments and cash flow issues. 

Next, we’ll move on to discussing the actionable strategies MSPs use to overcome them.

11 Effective Strategies for Optimizing MSP Payment Terms

The Definitive Guide to B2B E-commerce Buyer Demands in 2024, a report published by Hokodo in 2024, highlights the importance of offering flexible payment terms.

According to the report, 83% of B2B buyers will abandon a purchase if it does not offer payment terms. 

Additionally, B2B buyers list the availability of payment terms, product or service quality, and delivery speed as their three top priorities. 

Now that the importance of offering payment term options is evident, we’ll move on to the strategies that help MSPs do so effectively.

1. Customizable Payment Plans

Another way to optimize payment terms is to offer payment plans that can be tailored based on the customer’s preferences.

Some clients will have huge fluctuations in their income depending on the time of year.

These clients will benefit from a pricing plan that allows for smaller payments during slower periods and larger payments when profits are higher.

Similarly, personalized payment plans can offer clients options for installment or deferred payment terms if they experience temporary cash flow constraints.

Offering flexible financing (alternative funding solutions) can also help clients meet their financial obligations. When clients have faster access to capital, they can pay their invoices faster. In turn, your cash flow improves. 

Statistically, alternative lenders have higher approval rates for funding than banks. 

As of July 2023, the average approval rate from alternative lenders was 29.3%. For banks, the average approval rate was just 13.3% at the same time.

When you offer your clients flexible financing options, they can choose from a range of payment plans that work best for them. This includes buy now, pay later (BNPL) options, with varying interest rates and repayment terms.

Offering flexible financing plans can improve your cash flow and foster trust and loyalty with your clients. 

Make sure your clients are aware of their payment options to ensure they take advantage of them. 

Communicate with clients regularly and work with them to generate a payment plan that suits their budget. This also strengthens client trust while reducing risks associated with late payments or defaults.

2. Clear Contract & Invoice Language

Use simple, jargon-free language in all documents, including contracts and invoices. 

This includes drafting contracts or agreements in plain language, with charges and terms of payment clearly specified. When this is done, it is more difficult to misinterpret them.

Provide a detailed breakdown of each charge and describe these charges using language someone outside the industry would understand. 

For instance, if an invoice notes only ‘IT support services’ as a charge, this could be too vague, and clients might dispute the amount without realizing what the services entailed.

An invoice like this will likely confuse your clients because it does not provide a detailed description of the services you performed.

An alternative approach that gives clients more clarity is to indicate the specific tasks and the number of hours spent on each.

A more effective invoice could look like this: 

The second invoice offers a much more detailed explanation of the charges and services provided. 

Note that it includes clarification about payment terms, additional support hours, and emergency visits, and it encourages clients to call with any payment questions.

3. Early Payment Incentives

Offering early payment incentives encourages clients to settle up, improving cash flow and reducing the rate of late payments. 

Some MSPs provide a discount or other incentive to early-paying clients. 

A common example is "2/10, net 30." 

This term indicates that a client receives a 2% discount if they make their payment within ten days. If they pay within 30 days, the net amount is due.

Data from PayStand shows that companies offering early payment discounts see a 15% reduction in their average days payable outstanding (DPO).

4. Robust Payment Enforcement Policies

Robust payment enforcement policies are important. Ensure your client contracts clearly state what happens if payments are late, including late payment penalties. 

For example: ‘Any invoice that isn’t paid within 30 days will be subject to a 1.5% per month interest charge’.

Other enforcement mechanisms, such as withholding services until outstanding invoices are paid, are also an option. Use these cautiously to avoid straining or damaging client relationships. 

The payment policies should be clearly communicated to clients from the beginning so they are aware of the severity of their late payment. These measures encourage clients to pay invoices promptly.

5. Regular Payment Term Reviews

The payment terms that worked for your business last year might not be the most effective for this year. 

When the business environment changes, so should payment terms. MSPs should review their payment terms periodically to look for opportunities to improve or address issues. 

For example, an MSP might start with 30-day payment terms and then decide to reduce them to 15 days for clients who have made multiple late payments.

Regular reviews also allow you to address issues such as recurring late payments or disputes over billing. 

Payment terms can be altered in response to operational needs and the state of their client relationships.

6. Use of Escrow Services

For bigger projects or clients with a reputation for paying late, an escrow service—a third party that holds payment until certain conditions are met (such as the successful completion of a project or delivery of a service)—might be worthwhile. 

An escrow service provides security for the MSP and the client, as the payment will be released only after the work is completed. 

For example, an MSP might be engaged in an ongoing IT infrastructure project and could ask the client to deposit money in an escrow account at the start of the project. 

That money is then released as milestones are reached, ensuring the MSP is paid on time while the client is assured that their money is safe.

7. Digital Payment Solutions

The digital B2B payment market is growing quickly. 

Data from MarketsandMarkets expects its value to grow from $4.2 billion in 2023 to $8.2 billion by 2028, with an annual growth rate of 14.3%. 

Digital payment solutions offer features such as automated invoicing, real-time transaction tracking, and faster settlement confirmation to eliminate payment process inefficiencies. 

This helps streamline MSPs' administrative load and enhance clients' experiences.

For example, a digital payment solution could allow clients to pay invoices through a secure online portal.

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It could also be set up to send automated reminders to clients as payment deadlines draw near and for unpaid invoices. 

These features make receiving payments as easy as possible for the client, reducing the chance of chasing them for payments or dealing with inevitable delays.

8. Multi-Currency and Localization Options

MSPs working with international clients need to offer their payment terms in multiple currencies and localize those terms to meet local regulatory compliance and individual preferences. 

This reduces friction in the payment process and makes the terms enforceable in relevant jurisdictions.

For instance, an MSP that serves customers in the US and Europe could allow customers to pay in USD or EUR, depending on their locations. 

They could also adjust payment terms to satisfy local legal requirements, such as the European Union's Late Payment Directive, so the contract is legally enforceable.

Under the EU's Late Payment Directive, enterprises have to pay their invoices within 60 days unless explicitly agreed otherwise. 

Businesses are also automatically entitled to interest for late payments and €40 minimum as compensation for recovery costs. 

Late payment rules for transactions with American clients are subject to state law. 

Usually, statutory interest can be charged on late payments under a commercial contract. However, the rate and when interest begins to accrue vary by state. 

If a contract does not specify an interest rate, state prejudgment interest laws may impose a statutory rate. These also vary widely (e.g., 5% in Illinois and 12% in Nebraska). 

Some states may not impose interest on late payments unless explicitly stated in the contract. The applicable law typically states where the payment is due, not where the issuing company is located.

9. Client Feedback Loops

Maintaining open lines of communication is vital for managing payments effectively, and gathering client feedback is a key part of this process. Regularly seeking client input on payment terms can help identify any pain points they may be experiencing. 

For instance, an MSP could send out a survey at the end of each billing cycle asking:

• For feedback on the invoicing process
• About the clarity of the payment terms
• About any payment challenges the client is experiencing

During these interactions, it’s also beneficial to discuss any changes in your client’s business that could affect their ability to pay on time. You can proactively address these concerns and adjust payment terms before issues escalate. 

This approach strengthens client relationships and enhances their trust in your services, reducing the likelihood of late payments due to misunderstandings or poorly aligned terms.

Additionally, implementing automated payment reminders can support clear communication by keeping clients informed about upcoming due dates. 

These reminders, which can be sent via email or text message, serve as gentle nudges that ensure payments are made on time, streamlining the payment process and maintaining consistent cash flow.

10. Clear Onboarding and Ongoing Client Education

It’s essential to ensure that clients are fully aware of their payment obligations from the start of a new relationship. 

During onboarding, clearly explain the available payment methods and plans and provide comprehensive documentation outlining their responsibilities. Discuss any financial concerns or limitations your clients may have before the contract begins, allowing you to establish a realistic and sustainable payment plan.

Ongoing education further reinforces these payment obligations. 

Regular updates through blog posts, newsletters, and emails can keep clients informed about what happens if payments are not made, any changes to payment terms, or the introduction of new payment options. 

If you offer early payment incentives, be sure to highlight these as well.

Automated payment reminders are another effective tool for maintaining timely payments. These reminders can be sent as the due dates approach, keeping outstanding invoices top-of-mind for clients and helping them avoid late fees, penalties, or service disruptions. 

By consistently reinforcing payment expectations through clear communication and education, you create a more reliable payment experience.

While defining and enforcing MSP payment terms can present challenges, many effective solutions are simple. 

Leveraging MSP payment automation software can automate many of these strategies, reducing the need for manual intervention and ensuring a smoother payment process for you and your clients.

Conclusion: Enhancing Client Relationships Through Flexible Payment Terms

We have examined in detail some of the many challenges of MSP payment terms, from communication to contract ambiguity to adapting to the client’s cash flow. 

Addressing these challenges with the 11 strategies we've included will keep cash flowing properly and support and strengthen your relationships with your clients. 

These strategies, from using clear and straightforward contract language to incentivizing clients to pay early, make payment terms more manageable and reduce payment disputes. 

When payment terms are systematically managed, and clients are educated upfront on their obligations, the payment process is more predictable and reliable. 

Payment automation is a key piece of this, and that brings us to FlexPoint. 

FlexPoint is a payment automation system uniquely designed for MSPs. 

MSPs rely on FlexPoint’s features, including AutoPay and automatic payment reminder emails to automate manual processes and make getting paid simple. 

FlexPoint also offers working capital solutions that allow you to offer your clients financing options or access capital to grow your business. 

With one-click financing for your clients, they benefit from a fast, frictionless payment experience. 

This benefits you, too — increasing your clients’ purchasing power can increase your revenue. 

For example, when Loud & Clear, an Indiana-based MSP, wanted to work with more enterprise-level clients but was hindered by cash flow, they turned to FlexPoint.

With FlexPoint’s working capital solutions, Loud & Clear was able to accumulate capital before taking on larger clients. With this capital secured, they could offer their clients more flexible payment terms. 

Before long, invoices could be settled within 24 hours, and the MSP was able to work with enterprise-level clients with this additional access to capital. 

With $500,000 in new revenue generated with the help of working capital, Loud & Clear ultimately bridged the gap between growth and cash flow. 

Since their partnership with FlexPoint began, they have achieved:

• 400% revenue growth 
• 5x faster payment processing 
• Thousands saved in fees and interest

Like Loud & Clear, your MSP can reap the same rewards if you customize your MSP payment terms.

Streamline your payment processes and enhance client relationships with FlexPoint's automated payment solutions. 

Visit our website to learn how we can help you customize and optimize your MSP payment terms effectively. 

‍Schedule a demo today to learn more!

Additional FAQs: MSP Payment Terms

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