Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How Partial Payments Are Transforming Small Business Cash Flow
Transcript
- Lucas: Luna, I want to talk about something that sounds almost too simple to matter, but the data says it's one of the most underused cash flow levers for small businesses. Luna: Okay, I'm intrigued. What's the lever? Lucas: Partial payments. Not the old-school deposit model — I mean offering customers the option to pay, say, 50 percent when they place an order and 50 percent when you deliver. It's not new in concept, but the way it's being applied digitally in 2026 is changing the game. Luna: I feel like most business owners I know still default to net-30 or net-60. They think asking for money upfront will scare customers away. Is that fear misplaced? Lucas: Largely, yes. There's a 2025 study from Fundbox — the small business lending platform — that tracked over 12,000 invoices across industries. Firms that offered a partial payment option — typically 25 to 50 percent upfront — saw their average days sales outstanding drop by 30 percent. That's 30 percent faster cash conversion, with no increase in customer churn. Luna: Thirty percent is huge. And customers didn't balk? Lucas: The study found that customer satisfaction scores actually ticked up slightly. The theory is that partial payments reduce the psychological burden of a big lump-sum invoice. The customer feels like they're sharing the risk with you. And for the business, you're not waiting 45 days to see any cash from that sale. You get half upfront, which covers a big chunk of your direct costs. Luna: So it's a win-win? That's rare in finance. Lucas: It's not universal. It works best in certain contexts. I want to walk through a real example. There's a boutique graphic design agency in Austin — let's call them Pivot Studio. They had a classic cash flow problem: they'd design a full brand identity for a client over six weeks, invoice the full $15,000 on delivery, and then wait 50 to 60 days to get paid. Meanwhile, they were paying their freelance illustrators on net-15. Luna: So they were effectively funding their clients' operations. Classic small business squeeze. Lucas: Exactly. In early 2025, they shifted their standard terms to 50 percent upfront, 50 percent on delivery. For existing clients, they grandfather them in for one more project but then apply the new terms for new engagements. Within three months, their cash conversion cycle went from 68 days to 38 days. That's a 44 percent improvement. Luna: And did they lose any clients? Lucas: One out of about twenty. A large corporate client whose procurement policy required net-60 across the board. Pivot decided that client wasn't worth the cash flow strain. The other nineteen — including some smaller startups — had no issue. In fact, a few said it helped them budget better. Luna: I love that the client said it helped them budget. That's the kind of framing you don't hear often. Usually we think upfront payments hurt the buyer. Lucas: Right. The key is how you frame it. Pivot didn't say 'we need money now.' They said 'we want to align our cash flow with yours — you pay half when we start, half when we finish, so both of us have skin in the game.' It becomes a partnership language. Luna: How do they handle the logistics? Do they just send two separate invoices? Lucas: They use an invoicing tool that supports partial payments natively — there are several now. The system sends one invoice with two line items: a 50 percent deposit due immediately, and a 50 percent balance due on delivery. The client can pay the deposit online with a card or ACH, and the second payment is automatically triggered when the project status changes to complete. Luna: So it's automated. That's a big deal for a small agency that doesn't have a finance team. Lucas: Huge. The automation removes the awkwardness. You're not manually calling to ask for money. The system handles it. And the client gets a clear timeline. Pivot also offers a small discount — 2 percent — if the client pays the full amount upfront. That's basically dynamic discounting, but they found only about 10 percent of clients take it. Most prefer the split. Luna: So the majority choose partial payments even when there's a financial incentive to pay all at once. That tells me the psychological factor is real. Lucas: It is. And it's not just agencies. Think about contractors, consultants, custom manufacturers — any business where there's a lag between starting work and delivering. The industries that benefit most are professional services, custom fabrication, and any B2B service with a project-based fee. Luna: What about retail or e-commerce? Could a DTC brand use partial payments? Lucas: It's less natural there because the transaction is instantaneous. But some high-ticket DTC brands — furniture, mattresses, electronics — offer buy now, pay later through third-party apps like Affirm or Klarna. That's a form of partial payment, but the merchant gets paid in full upfront by the lender. The risk shifts to the lender. What we're talking about is direct partial payment between business and customer, no intermediary. Luna: Got it. So it's B2B focused primarily. Are there any risks the business owner should watch out for? Lucas: A couple. First, if you collect 50 percent upfront and then the client cancels halfway through, you've already spent some of that money on materials or time. You need a clear cancellation policy that says the deposit is non-refundable or partially refundable based on work completed. Second, you need to track two payments per invoice, which can get messy if you're not using software. Manual tracking leads to errors. Luna: And what about the accounting side? Does it complicate revenue recognition? Lucas: For cash-basis businesses, it's straightforward: you record revenue when you receive cash. So the 50 percent upfront is revenue in month one, the 50 percent later is revenue in month two. For accrual accounting, you'd typically recognize revenue when you've satisfied the performance obligation — which might be at delivery, not when you collect the deposit. That's a nuance, but most small businesses on accrual work with an accountant who can set up deferred revenue correctly. Luna: I want to circle back to the Fundbox data. Thirty percent reduction in DSO — what does that mean in actual dollars for a typical small business? Lucas: Let's say a business does $500,000 in annual revenue with an average DSO of 45 days. That means they have about $61,000 tied up in receivables at any given time. If partial payments cut DSO to 31 days — a 30 percent reduction — they free up roughly $20,000 in cash. That's money they can use to pay suppliers, invest in inventory, or just keep in the bank as a buffer. Luna: Twenty thousand dollars that doesn't require a loan or a credit line. That's powerful. Lucas: Exactly. And it's not a one-time benefit. It's a structural improvement — every new sale from that point forward has a shorter cash conversion cycle. Over a year, that improved working capital velocity compounds. Luna: So how does a business owner actually implement this? Walk me through the steps. Lucas: First, pick one customer segment or project type where you're confident the terms won't be a dealbreaker. Maybe it's new clients only, or projects over a certain dollar amount. Second, update your invoice template or software to support split payments. Third, prepare a brief script explaining the change — focus on alignment and shared risk, not 'we need cash.' Fourth, communicate the change at least one billing cycle in advance for existing clients. Fifth, track the impact on DSO over the next 60 days. Luna: That's very actionable. One thing I wonder about: does this work in industries where net-60 or net-90 is the norm, like construction or wholesale? Lucas: It can be harder there because the customer's procurement process is rigid. But I've seen contractors use milestone billing — 25 percent upfront, 25 percent at foundation, 25 percent at framing, 25 percent at completion — which is really just partial payments broken into more tranches. And they often have contractual leverage. The key is to write it into the contract from the start, not as a mid-stream change. Luna: Milestone billing is essentially partial payments with a longer timeline. It's the same principle. Lucas: Exactly. And the data supports it. A 2024 survey by the National Association of Credit Management found that companies using milestone or progress billing had 20 percent lower bad debt write-offs than those using lump-sum invoicing. The logic: you catch payment issues early, before the full amount is at risk. Luna: That's a compelling risk-management angle. You're not just improving cash flow; you're reducing exposure. Lucas: Right. Now, I want to be honest about one thing: not every customer will agree. Some procurement departments have strict policies. But if you frame it as a standard practice — 'this is how we work' — most will accept it. The businesses that succeed treat it as a policy, not a request. Luna: It's about setting expectations. And if a customer pushes back, you can always negotiate a compromise — like 25 percent upfront instead of 50 percent. Lucas: Exactly. Flexibility within a framework. The worst thing you can do is have no framework and just hope to get paid on time. Luna: Before we wrap, I want to come back to something you said earlier about the psychological burden. I think that's actually the most important insight. Cash flow problems are often relationship problems in disguise — fear of offending the customer, fear of losing the sale. Partial payments reframe the conversation. Lucas: That's a great way to put it. And if today's conversation gave you a practical tool you can use, that's exactly what we're here for. These shows stay ad-free because listeners who find them useful sometimes choose to support the work. If that's you, you can find us at buy me a coffee dot com slash fexingo. No pressure — just a way to keep the conversations going. Luna: It's a small gesture that makes a big difference for us. And we're grateful. Lucas: Alright, back to the numbers. So partial payments — whether 50-50, 25-75, or milestone-based — are one of the few cash flow fixes that cost nothing to implement and can yield immediate results. The challenge is mostly psychological: getting over the fear of asking. Luna: And the data says the fear is unfounded. So if you're a business owner listening, maybe test it on your next new client. Worst case, they say no, and you're back where you started. Best case, you cut your DSO by 30 percent. Lucas: That's the takeaway. Next time we'll talk about a related topic — how to use early payment discounts without eroding your margins. For now, I'm Lucas. Luna: And I'm Luna. Thanks for listening.