Learning relevant terms in your industry is how you establish yourself as a professional. But you shouldn't stop there.
As a business owner, you should also know of the standard terms associated with invoicing. After all, you'll likely have to deal directly with your finance team (or act as one) to keep your business functioning.
Understanding invoicing terms will help ensure you can manage your own business finances. So we put together a quick list of 11 terms you should know.
Let's take a look!
1. Quotes and Estimates
Hopefully, you're already familiar with these terms -- most business owners are. Especially since they have to send estimates and quotes to prospects regularly.
But one thing we notice is that quotes and estimates are used interchangeably when they shouldn't. There's a difference between the two -- do you know what it is?
Estimates are just that -- estimations of what a product or service may cost. It's not exact, so it's pretty much a guesstimate. In most cases, the end price will differ from the estimate a customer receives.
It's important to know this so you can give your customers a heads up about the potential rise or drop in the actual cost.
This is where quotes come in handy. These are more detailed and outline what items will cost a customer. You provide this when you're giving the exact amount of what they'll spend ahead of time.
2. Terms of Sale (TOS)
This is just as it sounds -- the terms you have in place when customers make a purchase (the sale). In your TOS, you should outline what's expected of the buyer when they agree to buy.
It should also detail what's required of you as the seller. For example, it should include:
- A definition that talks of your service or products
- The estimated time of delivery
- The methods of payment you accept
- Who's responsible for taxes and fees
- Info on warranties, guarantees, etc.
- Penalties for not following through (both parties)
- Dispute resolution
With all of this covered, you can prevent unnecessary problems in the future.
3. Recurring Payments/Invoices
If you're in an industry where customers frequently purchase from you, then it's good to consider setting up a recurring payment model. Think of brands like Netflix, Amazon, and others that offer a monthly rate in exchange for a product or service.
On Amazon, some sellers offer a subscription rate, which is lower. Those that sign up agree to receive products monthly (or another arrangement) for the reduced price.
Recurring invoices are necessary if you're not automatically deducting payments from customer bank accounts or credit/debit cards. You can use tools like invoicely to set up recurring payments (weekly, bi-weekly, monthly, etc.).
With this setup, you can better predict your monthly income. And keep an eye on your customer retention rates.
4. Net 30
This is the typical arrangement for larger companies. It's when you allow your customers to pay their invoice within 30 days.
Of course, this isn't plausible for every business, which is why you'll also find other arrangements, such as Net 7, Net 15, and so on. You can decide how long you give customers to pay.
Just keep in mind that you should select a plan that works for both you and your clients.
Also, include the terms in your payment agreement, along with when the timer starts (i.e., on the day of the invoice).
5. Payment on Receipt
Maybe you don't want to give your customers days or weeks to pay their invoice. If so, then you can create invoices that require payment on receipt. This is a common arrangement for freelancers and small/medium businesses.
Then it also depends on the industry you're in. For instance, in the retail business, you require immediate payment before the shipment is sent.
What's great about the payment on receipt (or due on receipt) arrangement is that you can maintain consistent cash flow (without chasing down money).
Make sure to include consequences in your payment terms for when the arrangement is broken.
6. 2/10 Net 30
Let's say you have a Net 30 payment plan with your clients. But you want to promote your customers to pay earlier.
In this case, you can set up a 2/10 Net 30 (aka a 2% 10 Net 30). In this arrangement, you're allowing customers to pay your invoice earlier than 30 days in exchange for a discount.
If they pay within 10 days, they can take 2% off their bill. You can also set this up in other ways, such as a 2/7 Net 20 and so on.
Make sure to include this on your invoice as a reminder, so they're more likely to take you up on the offer.
7. Line of Credit Pay
Some companies work with customers on a credit basis. This is when you provide a product or service in advance, then you're extending credit to them.
Of course, you should be wary when doing this -- such as by checking their history with paying other vendors.
A lot of businesses don't charge interest, but then there are others that do. By charging interest, you help push clients to pay quicker. So it's definitely something you want to consider doing.
The payment terms vary -- some allow customers to pay within 60 days, while others allow 90 days. Normally, payments are being made over this period.
For example, they pay 1/3 each month, so it's paid off by 90 days. If they go the full 90 days, then they end up paying more if you're charging interest.
This turns into a win for the company who makes more in the long run.
8. Interest Invoice
This falls in line with charging interest to customers you extend credit to. However, you can also use the interest to penalize late-paying clients.
It's critical to let your customers know in advance that they'll face a penalty charge for payments after the due date. Detail this in both your payment terms and invoice.
You need to include a break down of the fee you're charging with each new invoice you send. You can set it up so that each week or month interest is added on.
The purpose is to get your customers on board with making on-time payments.
9. Invoice Factoring
Waiting for invoices to be paid is tough when you rely on cash flow to maintain inventory. So to help get money in your accounts sooner, you can use invoice factoring.
This is when you sell your unpaid invoices to third-party companies. They buy the debt from you so you can maintain steady cash flow.
Now, don't mistake this with debt collection. These agencies aren't bill collectors in that sense. They just track your invoices and collect what's owed after paying you.
What's excellent about invoice factoring is that it allows you to get immediate payment. So if you want to offer your customers the luxury of a Net 30 deal, while you get paid immediately, then so be it.
It removes the hassle of dealing with late payers so you can run your business efficiently.
10. Payment in Advancement (PIA)
Speaking of getting payments on time, there's another way to handle your invoices -- with advance payments. Payment in advance (PIA) is a common practice, especially for smaller businesses.
You can request that your customers pay you before receiving your product or service. Much like they do in retail and fast food industries.
It's essential to look into your competitors to see if this is a common practice in your industry. If not, it may be a turn-off, making it challenging to secure new clients.
So travel lightly here.
11. Progress Payments
Another term for this is stage payment. This is when you bill your clients based on milestones. Once you reach each one, you send an invoice for payment.
This allows businesses to create steady cash flow during long-term or larger projects. You'll need to go over the approval process so it's clear what the expectations are and who must approve it.
Understanding the Invoicing Process
When you're in charge of managing or approving invoices, then it's vital that you know these and other invoicing terms. Not knowing them could place you in a situation where you're struggling to get organized (and paid).
You've likely come across some of these terms in your line of work. But if you're just starting out with business finance, then you'll find this list helpful.
Try to remember these terms so you can improve your knowledge and management of finances.
If you have questions, feel free to ask them in the comments!