When you’re setting up a new business, it’s imperative that you figure out your invoice policies early on. Ensuring that you have the right payment terms is crucial if you want to be paid on time.
The last thing you want to be as a business is vague about your terms, which is why you have to think very carefully about the payment terms that you want for your invoices.
How Will My Business Be Impacted by Payment Terms?
The payment terms that you chose for your invoices have a big impact on your business. Larger companies—while wanting to be paid on time—can afford it when payments are late. Unfortunately, smaller and medium-sized businesses often can’t manage without being paid on time.
It should be a straightforward task: you send the invoice, the client pays the invoice, everyone is happy. And yet this is not how it always works.
Your cash flow will be affected by the payment terms that you set out, which is why complete clarity is vital to the success of your business. Your clients will look at the due date for the invoice to be paid and pay it accordingly.
For instance, if you choose thirty-day payment terms and then expect payment in two weeks, you’ll be sorely disappointed.
Also, some businesses rely on being paid on time for projects to continue to move forward. If you align your payment terms with how you move projects along, you’re more likely to keep projects moving efficiently.
There’s also a customer service aspect to choosing payment terms. Maintaining good client relationships is important and a part of that is not feeling like your relationship is tense while you wait for payment to be made.
The terms that you set on your invoices should include details like late payment fines and penalties, the specific currency that your business deals in (especially if you do international business), and the ways that you expect to be paid.
Some companies choose not to allow their customers to pay via check, for example. The most important detail that every company should include is the expected payment date.
Sometimes, you can’t set the payment terms, especially if you’re dealing with a larger corporation. Their payment terms are usually set by their finance department and they have their own invoicing policies.
Should I Offer Long or Short Payment Terms?
Payment terms vary from business to business, and while it was once the case that companies would allow people to pay within thirty days, times and payment terms are changing!
Long payment dates were the norm when sending checks in the mail was the standard, but we’ve upgraded with the times and most of the time, payments are made online.
Electronic invoices with time and date stamps have made the days of stamps and paper invoices almost completely obsolete.
Businesses require their cash flow to keep moving, so if your company is offering generous payment terms and yet people are paying later and later each month, you’re essentially running your business into the ground with a stagnant cash flow that isn’t being managed correctly.
The way that your business remains successful is going to be set in the payment terms that you offer. Communication is key with your clients, and the payment terms that you use are the way to maintain those relationships.
Below, you will find some of the most important payment terms that you could include in your invoices.
Terms of Sale
The terms are simple: these are the very conditions that you have agreed to with your customer. These should include the:
- Cost of service
- Amount to be paid and when
- Delivery terms
- Accepted payment methods
- Due date for payment
You’ll find that these are exactly what you need to put onto any of your invoices, too. Terms of sale have to be as clear as possible on an invoice so that there are no disputes about payment.
If everything is written plainly, it’s more difficult for misunderstandings to happen. Adding the terms of sale is important, but it’s particularly important for those businesses that deal with international trade deals.
Payment In Advance
This one is a simple term to understand but can also be written as PIA. Payment in advance is a payment made ahead of schedule, similar to a deposit.
Depending on the cost of the item or service, it’s not unusual for a business to ask for a deposit in advance of receipt of goods, especially if you’re freelancing and need some security.
Up to a 50% down payment is pretty common and it can protect you as the seller from being out of pocket if your client decides to pay you too late.
Due On Receipt (Immediate Payment)
Sometimes, a business needs payment immediately without any waiting around. This is usually something that retailers ask for and if the payment isn't made immediately as per the invoice, then the seller has the right to repossess the intellectual property.
It’s a good thing for a business owner, as it means that they can try to speed up the payment process. But for a client, it could leave a bad taste as they may not have the cash to cover the bill straight away.
Learn more: What Does Due on Receipt Mean?
Lots of numbers here, but these all refer to the payment terms and when they are due to be paid. However, this is not the same as saying ‘due in the 30 days’, which is where it can get confusing for clients.
Net 30 payment terms mean that you have the chance to incentivize repayment by offering your client a discount and money off the total if they pay earlier than the stated terms. However, if the payment isn’t made within the set timeframe, there’s usually some kind of penalty.
Net payment terms are great for long-standing customers because you’re giving them a chance to save money by paying early, which they’ll greatly appreciate.
Learn more: What does Net 30 Payment Terms Mean?
2/10 Net 60
This is similar to the previous payment terms. If you make it clear that your bill has net 60 payment terms, and you have 2/10 written before it, this implies that a 2% discount will be given within the first 10 days of payment.
You can increase this percentage and even add discounts as the days grow if you want to. Sweetening it with 10% off in the first ten days can make it much easier for you to actually get paid in a timely manner.
The way to look at it is that you deserve to be paid on time, but that doesn’t mean that larger business clients can manage it with their accounts rules. Always keep your terms simple so as not to confuse someone who is less savvy with accounting.
Line of Credit Pay
Some clients are regulars and when it comes to dealing with them, it can be much more business savvy to offer them the chance to settle their bills over a longer period of time.
Some companies like to run this on a quarterly or a monthly basis, and it’s allowing the customer a line of credit for their purchase.
This is a risk to take for a small business who may not be able to afford the loss if a customer doesn’t pay within the specified terms of the credit. Therefore, it’s not a bad idea to credit check your customers if you want to offer a line of credit, so as to ensure that they can make those repayments.
Providing a service means that you deserve to be paid, which isn’t something you can always afford to forget in the face of being polite.
Usually, this refers to the consequences that occur when an invoice isn’t meeting the payment terms. The biggest benefit of charging interest is it deters clients from paying late.
Remember, some clients miss payments simply because they forget or prioritize other bills over yours. But if they’re going to have to pay more money for being late, it’ll move your invoice to the top of their list and they’ll be more diligent about paying you.
Only ever charge interest per day after the invoice is due to be paid in the first place. It’s also a good idea to have a grace period if you’re going to charge interest on an late invoice.
For instance, you might give the client five days after the due date, then the interest will kick in. That way, you’re giving the client a heads up and only using the interest as the last option,
Clarity is Key With Payment Terms
When you choose your payment terms, you need to be as plain as possible. Keep it polite and professional, and it doesn’t hurt to incentivize your customer to pay you on time.
Clear and specific payment terms keep everyone on the same page and working toward a better relationship.