Different Payment Terms
Invoicing problems are an all-too common challenge for small businesses. According to numerous studies published by Xero, a company that develops cloud-based accounting software for SMEs, approximately 33% of invoices are paid 2 weeks late, and a total of 60% of invoices are paid late overall. Xero’s extensive studies from thousands of clients confirm that these statistics are not limited to UK clients – it’s a universal problem with small businesses. The fact of the matter is that small businesses struggle to get paid on time, due largely to ineffective and inefficient invoicing systems.
The invoice payment terms and conditions are sacrosanct when it comes to getting paid on time. When Xero analysed some 1,500 businesses, studies revealed that there are many things that can be done to improve the likelihood of payment through correct use of invoicing systems. Foremost among them are the invoice payment terms. In the days of old, businesses would mail their invoices to their clients at the end of the month and give them sufficient time to make payments. Today online invoices (e-Invoices) allow for immediate transmissions of invoices, rendering lengthy payment terms and conditions obsolete.
Further exploration of this topic highlights the most crucial factors:
- Invoice payment terms may include late penalties that may be levied if a client does not pay on time.
- Invoice payment terms must include the currency being used or must accurately convert the currency on all invoices.
- Invoice payment terms must clearly highlight the accepted payment forms for the business. Many businesses don’t take checks, credit cards or bank wires for the risks/costs associated with them.
- Invoice payment terms must clearly specify the date upon which payment is due. Many businesses stick to the 30-day payment rule, but this is not ironclad. Payments can now be effectuated for any convenient timeframe for the business owner/client. Nowadays, many businesses can issue invoices and expect payments within a day, or a week. There is no reason to wait inordinate amounts of time to get paid.
- A myriad of studies indicate that 70% – 80% of businesses issue invoice payment terms of less than 2 weeks, with 50% + of those businesses requiring payment to be made within 7 days.
One of the most important considerations with the issuance of invoices is sending it out on time. The setup and preparation time for sending invoices has been significantly shortened thanks to online invoices. Today, it’s entirely possible to craft a professional invoice within minutes and have it sent to your client within the hour. Certain businesses have a cut-off point by which they must receive all invoices for the month, if you miss that cut off point, you could be setting your receipts back to the next pay period – so keep that in mind.
Any delays in the creation and issuance of invoices naturally result in a payment receipt delay. It’s important to act purposefully when creating invoices to ensure the timely creation and delivery of professional invoices. Various online invoice systems are now available to help expedite the invoicing process. It’s entirely possible to draw up a professional invoice from your smartphone, tablet, PC, or Mac.
What types of payment terms are available with invoicing?
Invoice payment terms are delineated according to different codes. These include the following:
- Cash on Delivery – COD
- Cash with Order – CWO
- Cash Next Delivery – CND
- Cash before Shipment – CBS
- Payment in Advance – PIA
- Payment for the End of the Month – EOM
- Payments at Agreed Stages – Stage Payment
- Payment 7 Days after the Invoice was Issued – Net 7
- Payment 10 Days after the Invoice Date – Net 10
- Payment 30 Days after the Invoice Date – Net 30
- Payment 60 Days after the Invoice Date – Net 60
- Payment 90 Days after the Invoice Date – Net 90
- 21st of the Month after the Invoice Date – 21 MFI
- No Credit – Account Conducted on a Cash Basis – Cash Account
- Payment Offset against Supplies Purchased from the Customer – Contra
In all instances when payment terms are set up, it’s important to be as clear as possible with the client. Abrupt changes in payment terms/scheduling can be confusing for clients, especially if they are used to making payments in a certain way at a specified time. When there is clarity, conciseness, and consistency, it is more likely that clients will honour the invoice payment agreement with customers.
How Best to Use Different Terms of Payment?
The invoicing process is a complex minefield for the uninitiated. This is especially true when it comes to different terms of payment that must be set up. Since many business owners are blissfully unaware of the importance of the right invoicing system, and the right terms of payment. It’s worth evaluating when to use different payment terms.
- Luxury items, expensive services and other big-ticket sales should be accompanied by an invoice bearing split payment options. Remember that a business’s strongest asset is its cash flow. If you’re requesting full payment for expensive items in a short time, you may be biting the hand that feeds you. You will need to have an effective accounts management system established if you’re going to be accepting split payments from clients. However, this will help your customers and ultimately help to grow your business.
- If you use an invoicing system bearing the term Net 30, this may be confusing to clients. You may wish to use the term 30 Days as this will clearly indicate to your clients that they have 30 days upon receipt of the invoice to make payment. It is imperative that a due date is always included in all invoices. Failure to include due dates will result in overdue payments, non-payments, or partial payments.
- If you’re going to be using a discount-style system for prompt payments, it’s best to highlight that in bold on the invoice. You may be inclined to offer clients a 1% discount if payment is made within 7 days, or a 2% discount if payment is made by the next day. These incentives are designed to expedite money receipts and offer the client benefits for making prompt payments.
- Manufacturers across the board typically offer Net 30 terms. If you are in that field, and you change the terms and conditions, you are likely to meet resistance from your customers.
- Construction industries and fashion industries use Net 30 and Net 60 – so bear that in mind if you are supplying goods or services to clients in those sectors.
- If you’re a freelancer, the terms of payment that you should opt for are partial upfront payments (a down payment) followed by escrow-style payments until the work has been completed. You may also wish to consider a full fee upfront, Net 30, or Net 60 depending on the relationship you have with your clients. In all cases, it’s important to comply with the industry standard to avoid any unnecessary mishaps with clientele.
When setting up invoice payment terms and conditions, there are several other factors to bear in mind. Remember that there is no blanket solution that applies to all clients. Even within certain industries, you may find a client who makes immediate payments upon receipt of an invoice, while another client in the same industry requires Net 60 terms. It’s up to you to work out a payment regimen that is suitable and applicable to both parties.
There are certain elements that will determine how long you should let an invoice ride. The smaller the value of the invoice the quicker you want the payments to be received. Higher-value invoices may be more difficult to fulfil on the client’s behalf, so a little lenience goes a long way. It should clearly be specified whether there are late fees associated with invoice payments, and they should be communicated under the payment terms and conditions.
Styles and Formatting for Payment Terms
When creating invoices, your clientele will appreciate a degree of flexibility. All businesses experience fluctuations in their cash flow cycles. You may be required to offer flexible terms and conditions to specific clients based on market conditions. Sometimes you may need to extend the payment terms and conditions, and at others, you can expect payments more promptly.
The quicker you’re able to get paid, the better off your cash flow situation. There are ways that you can set up your invoices to ensure an improved cash flow situation, such as discounts on early payments. Prompt payment discounts (PPD) are commonly employed by small businesses to help them get their money in on time. If an invoice’s due date is Net 30, and they pay you after 2 weeks, you may wish to reward them with a discount. The value of this discount is entirely dependent upon you. Typical discounts range from 1% – 3% for early payments. Various automated invoicing systems allow you to offer favorable terms to your clients.
For example, if your customer pays you within 10 days on a Net 30 invoice you may wish to offer them a 2% discount written out as 2%/10-Net 30. Discounts are always appreciated by clients, and they also help to bring in your money much quicker. This allows you to meet your own payment requirements and stay in the black. Invoice terms are particularly important in that they serve as your official channel for receiving payments. They establish a legally enforceable framework according to which your payments are to be received. If your business is selling big-ticket items to customers, and those customers are paying late, you will be required to finance payment of your creditors to carry your customers.
As you can imagine, the costs of not being able to meet your own financial commitments can sink your business operations post-haste. Invoice terms are not quite the minefield that many business owners make them out to be. It is easy to navigate this arena if you have a little insight into the nature of payment terms and conditions for your industry/sector/category of business operations. Use reputable and established invoicing systems to make your life easier, and you will likely get paid sooner too.