Trade Terms: Milestones Versus Progress Payments

Whenever a business offers payment terms to their customers they become a sort of “lender.” The customer owes for the work, and the business is waiting for payment, essentially a business loan. There are things a business should note when offering terms that may bring beneficial results in the future. If a company has a strategic capital plan and the intent to raise outside capital, then knowing what makes the transaction attractive may make all the difference in securing capital. Certainly with invoice factoring, this holds true.

A contract for payment might include one of the following terms; milestone payments or progress payments. For a factoring company, these distinctions are critical to securing accounts receivable financing. Milestone Payments in a contract means, very specific deliverables are outlined in the agreement whereby when the milestone has been reached, the customer will pay an agreed amount. Progress Payments, on the other hand, only allow for regular percentage payments of the entire contract. For example, on a million dollar contract the customer agrees to pay the business $100,000 a month. The difficulty with this arrangement, for a factoring company is, for whatever reason if the customer is dissatisfied with the work they will stop making payments. This puts the factor in jeopardy trying to recover payments. Many factors will not finance a progress billing contract.

By specifying very tangible work events, once the customer has verified that they indeed receive the product or service outlined in the contract, the customer will have to pay the invoice as per the agreement. A factoring company who must rely on winning in a collection dispute will be able to advance on a milestone payment.

Knowing this distinction ahead of time, and making the necessary changes to the contract will better guarantee access to outside capital further down the line.

Knowing this distinction ahead of time, and making the necessary changes to the contract will better guarantee access to outside capital further down the line.