10 Reasons to Include Payment Terms on All Your Invoices
As a small business owner, you need to include payment terms on all invoices you send to your clients. Payment terms outline how quickly you expect payment for your services and the different payment methods you accept.
All companies, regardless of the industry or size, need regular cash flow to pay expenses. When businesses receive payments on a predictable schedule, they can easily create a budget and make financial forecasts so to prevent any cash flow problems. In other words, your business’s success may depend on the invoice payment terms that you create when sending out invoices. Invoices are the mechanism by which cash flow occurs, but all invoices are not the same.
The 10 Invoicing and Payment Terms to Include on Invoices:
Terms of Sale
Essential components of any invoice, payment terms spell out what you and the buyer agree on and all the mutual expectations. Including these prevents misunderstandings and disagreements.
Payment in Advance
Payment in advance terms protects you against clients who fail to pay their debts and help cover out-of-pocket expenses needed upfront. For example, it’s not unusual for a freelance web designer may require a 50% down payment on the total fee before starting a project.
Immediate Payment
Sometimes called “Cash on Delivery,” “COD,” or “Payable on Receipt,” this term requires payment at the time the product or service is delivered. While business owners like how much it speeds-up the payment process, many of my clients only have me reconcile their books and cut checks once a month. Depending on when the invoice is issued, you could be putting undue pressure on your client to remit outside their normal business process. The remedy for non-payment is the return of goods or intellectual property.
Net 7, 10, 30, 60, 90
An invoice that uses net payment means that the client must pay within 30, 60, or 90 days AFTER the invoice date. For example, an invoice dated January 11, using Net 30, is due before February 10. Because this term can be confusing, consider using “Days” instead of “Net.”
Pro Tip: Keep cash flow positive with shorter terms like, “Please make payment within ten (10) days.”
2/10 Net 30
These kinds of terms are a way to reward clients who pay early. “Net 30” requires payment within 30 days, and if they pay within ten days, they receive a 2% discount. You can be as creative as you like. You could sweeten the deal by offering a 5% discount for invoices paid within a week.
It’s best to word this simply so that it doesn’t confuse the client. “Please pay within ten (10) days and save 2 percent” makes the offer clear and concise.
Line of Credit Pay
This option is risky for small-to-medium sized businesses because you are essentially offering your services on credit, which could decrease your cash flow. This payment option does allow the client to settle their bills over time — typically on a monthly or quarterly basis.
Quotes & Estimates
Quotes are for clients who are still price shopping. While this is only an estimate, it still needs an itemized breakdown of the price and a date when the work will be complete.
Recurring Invoices
Recurring invoices work like subscriptions and guarantee your cash flow. Because the amount is the same each month, these payment terms make forecasting a breeze and erase some of the uncertainty and make life easier.
Interest Invoice
If a client doesn’t pay on time, one option is to charge interest or fees on the unpaid amount. Remember, to charge only for the number of days that the payment is overdue.
An interest invoice contains a reminder of past due payments, any interest charges, and a date by which your customer should settle the debt. If the invoice remains unpaid, resend it each month with adjustments to the calculation reflecting any additional days past due.
Invoice Factoring – Bill Collection
If you have several unpaid invoices, you could sell the outstanding debt to an invoice factoring company. Unlike a business loan, invoice factoring increases cash flow with money already owed to your business. The process is simple; sell your outstanding invoices to a factoring company that pays you a lump sum that varies but could be anywhere between 70 and 90 percent of the invoice total.
Conclusion
The best practices for setting terms of payment are:
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- Keep your payment terms brief and easy to understand
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- Offer incentives for early payments and payment in full
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- Charge late fees (interest)
- Offer a variety of payment options
Clear, specific, and consistent payment terms on all your invoices create happy customers and healthy cash flow.