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Understanding Invoicing Payment Terms

Does the term payment terms send your head into a whirlwind of confusion? Are you uncertain of what payment terms to use on your invoice? Getting paid promptly is critical for running a profitable business. If you don’t clearly outline your payment terms, it’s very likely your clients won’t pay you on time. There are various invoicing payment terms to include and this guide will help you choose which ones are the most appropriate to your business.

1. What are payment terms?

Payment terms refer to the precise details regarding the expected payment of a sale. That is, it specifies how much time a client/buyer has to make a payment on a purchase. These terms also include payment methods and any special agreements. For example, discounts or early payment incentives and any late fees, if applicable. When invoicing payment terms correctly, you’re in a much better position to plan ahead for future payments.

Without this information, you can’t define, communicate and agree with clients when exactly payments are due. This could lead to late payments and cash flow problems, resulting in financial inefficiency for your business. It’s crucial that you agree on the payment terms before any work starts or sales made to avoid any misunderstandings between both parties.

When you agree to fixed payment terms with a client, it means you can budget more easily and make financial forecasts for the future.

2. Common payment terms to use

There are a range of terms for outlining payments so how do you know which one to use? Ultimately, it will depend on your business, contract and relationship with your client/buyer, but these are the most common terms to use.

  • Terms of Sale: cost, delivery, payment method and date due are all the core elements of creating an invoice.
  • Payment In Advance: this will only apply in certain circumstances. For example, if you don’t have confidence in a buyer’s capacity to pay. This will minimise any risk to you for your services/products. It can also refer to needing a down payment or milestone payment before starting an ongoing project.
  • Net 30: this when a full payment is due within 30 days of sending the invoice, and is the most common time scale in UK invoicing systems. However, it can give rise to confusion in which case, it might be clearer to uses ‘Days’ instead of ‘Net’. Similarly, the following terms also apply: Net 7, 10, 30, 60, 90 whereby you may offer a varying payment schedule according to the specific timescale.
  • Discounts: you may want to include a discount to motivate clients to pay you quicker. If you’re offering a discount for next day or 7 day payments, ensure it stands out on your invoice as an incentive for customers to pay promptly.
  • Subscriptions/recurring fees: this is when you agree with a client to pay on a regular basis ie monthly or annually. Automated invoices are very useful for this mode of payment terms.
  • Late payment penalties: to improve the chances of a client paying you on time, it’s a good idea to outline these terms should the problem of late payments arise.

3. Payment options on an invoice

The payment options that you make available should provide your clients with a variety of methods. This ensures that a client can choose the most convenient way of paying you. Consequently, it will help to get your invoices paid quicker. This is because it offers clients more flexibility for a smooth and easier way to complete a payment. When choosing suitable payment options, consider which ones work best for your business model. You should also take into account their costs, how secure they are and are clearly represented on your invoice.

The most popular payment methods are:

  • Cash: this is a more common method of payment for a bricks and mortar business because of suitability, absence of transaction fees or processing time for both a business and the client.
  • Cheque: although less common for exchanging goods/service, they are a less risky option than cash in certain situations. However, cheques can take days to clear. Plus,there is no guarantee that they may bounce if a client has insufficient funds in their account.
  • Bank transfer: using this method in your invoicing payment terms is quick, easy, free and secure. Therefore, it’s often the most preferred method of payment. All you need to do is set up direct transfers into your business bank account and provide the client with your banking details.
  • Credit cards: due to their security, credit cards, such as Visa, Mastercard, etc, are a useful way to carry out payments. That said, it’s likely to add transaction fees onto the final bill.
  • Online payments: this type of payment is secure and usually quick to process. You can use an online payment system such as Paypal or Stripe, but you will have to pay for transaction fees. Alternatively, accepting online payments will already be an option if you use cloud-based accounting.
  • Mobile payments: similarly, a mobile payment is a quick payment method that also charges a transaction fee. However, it is a convenient way for clients to pay as you’ll only need a mobile payment reader that connects to an app on your smartphone.
  • Automatic payments: choose any of the above payment options along with a specific agreement you make with a client. Automatic payments are scheduled for an exact time each month so both parties know when a payment is made.

4. Defining payment terms on an invoice

When creating an invoice, you want to be concise and clear. This will not only help to limit misunderstandings but also improve customer relationships. Therefore, make sure the client knows exactly what they’re paying for by including a breakdown of services/products along with the price.

  • Be polite: treat a client the same way you would in person. Write invoices courteously so you increase the chances of a positive relationship which may even lead to a faster payment.
  • Be concise: payment terms are designed to help, not hinder understanding and your invoice should reflect this. If there is any doubt with your terms, use other means of further explanation.
  • Set deadlines: make your deadlines and late payment terms very precise for a client. So, for example, write the exact due date for payment.
  • Use flexible payment methods: the more payment options you give a client, the better chances you have of them paying on time.
  • Reward early payments: make it obvious that if a client pays earlier than the due date, they will receive a discount from their final bill.
  • Include international currencies: it’s advantageous for you to let clients pay in their preferred currency to avoid a late payment.

5. Regularly review payment terms

You should always review your invoicing payment terms with each individual client. This way you can weed out consistent late payers who are having a negative affect on your cashflow. Using small business invoice management software, can automatically so this for you so you’re able to track your recurring payments and payment plan. This leaves you to concentrate on those clients where you can move forward with a positive working relationship.