What is a Short Payment?

Nov 3, 2022 by Kelsey Banerjee

A short payment is a partial invoice payment, and it can be caused for various reasons. Most commonly, a short pay occurs when a customer is stalling or if they are dissatisfied with the goods or services performed. For the AR team, handling a partial payment can often be challenging. You can't close an invoice because the total hasn't been paid. At the same time, your team will need to continue to follow up with the customer to collect.

Honing in on why customer payments aren't always made in full can help determine best practices for payment processing.

Why short pay an invoice?

There are many reasons customers choose to send a partial payment. The list includes:

  • Products were defective or damaged
  • Services and goods were not delivered under contract terms
  • Marketing discounts, sales tax exemptions, and promotions were applied in the invoice but not listed
  • Early payment discounts were not applied to the invoice
  • The customer is on a custom payment plan
  • The buyer doesn't have enough cash for the transaction
  • The customer wants to apply the early payment discount after the deadline
  • The buyer is hoping you will write the payment off as bad debt
  • Human error in regards to the payment method, business details, or other required payment information

The AR and collections team often have to balance customer relationships with capturing payments. To do that, it's essential to be fully aware of whether the short pay was expected or not.

Decoding expected or unexpected short pays

An expected partial payment may be handled by the AR team. This is often the case when customer payments apply an early payment discount, sales promotion, or another deduction that reduces the invoice amount. Such instances are often included in the contract agreement, can be verified, and do not generate penalties.

On the flip side, unexpected short pay requires your accounts receivable team to track down the customer, find out why they didn't pay, and determine if the reason was legitimate. If the issue revolved around defective goods or services, the AR team would need to document the complaint and request proof. They will then need to either agree with the claim or refute it, which takes even more time and resources - without the guarantee, the remaining payment will be sent to the business bank account.

Unexpected short pays that slip into late payments also generate penalties and late fees, according to your specific payment terms.

How do you resolve short pay invoices?

Since expected short pays are rarely an issue and are covered by payment terms, AR teams typically focus on unexpected partial payments.

Resolving all unexpected short pays is impossible. However, they can be greatly reduced by implementing a comprehensive payment strategy. Ultimately, the more unexpected late payment cases your AR team handles, the more time is spent on repetitive administrative tasks.

Ways to minimize late payments, unexpected partial payments, and bad debt are:

  • Using electronic invoicing and payment methods
  • Offering various payment options
  • Providing short-term payment plan options
  • Drafting automatic follow-ups
  • Including late fees and penalties in the payment terms

Short payment best practices

Even with early payment discounts and digital transfers, not every client will send an immediate payment. However, you can ease your cash flow and decrease time spent on short pays by following these best practices:

  1. Be clear and concise about your payment terms in the buyer agreement.
  2. Send electronic invoices, ideally with a self-service payment portal for a no-hassle customer experience.
  3. Offer more than one payment method. The more ways to pay, the more likely your customer will pay faster.
  4. Use deduction codes for easy management of early payment discounts, promotions, and other legitimate reasons for short pays.
  5. Work with an ERP and payment integration that includes transaction dispute options.
  6. Limit credit to customers with a good payment track record.
  7. Implement a digital AR solution that captures data from the first invoice to payment collection.
  8. Create automated follow-up workflows.
  9. Generate receipts promptly—automation makes this is a cinch.

Map your payments strategy

Short pays don't have to constrain your cash flow. A solid payment strategy, and the software to execute it, can streamline collections, promote immediate payment, and reduce unexpected short pays.

As a leading B2B payments platform, Paystand provides your AR team with the tools they need to succeed. From end-to-end AR automation, a seamless customer payment experience, notarized receipts, partial payments, and ERP integrations, your team can boost earnings and keep track of core KPIs. Combined with customizable collection plans, Paystand has everything you need to handle short payments.

To see how easy collections can be, book a demo with our payment specialists today.