When you invoice a customer you want to get paid as soon as possible, right? Payment terms can be your best friend when it comes to solidifying your business cash flow. Choosing the right invoice payment terms can get you paid faster while establishing trust and healthy relationships with your customers. However, they can also put you in a precarious situation if they do not adequately support your operations. Choosing the wrong invoice payment terms can significantly derail your cash flow and alienate customers. For a small business owner, it can be difficult to know what invoice payment terms to choose. To ensure that your invoices are paid on time, you need to do your research to determine the best invoice terms to offer your customers.
First, let’s define invoice payment terms…
The invoice payment terms you choose determine the length of time given to a customer to pay off the amount due for goods or services. It could be due upon receipt, or a payment plan of 30, 60, 90 days, or more. Net 30 is a payment term often used which means the customer must remit payment within 30 days of the invoice date. The terms not only dictate the due date for the payment but also define any discounts that might be applied as well as payment plan details, interest and penalties for late payments, and the methods of payment your business accepts.
So, why are invoice payment terms so important?
Invoice payment terms can determine the quality of your relationships with customers and directly affect your business’ overall fiscal health.
The financial impact can be greater than you may think. Let’s consider a scenario that isn’t far-fetched. You invoice your customer with Net 30 terms. Your customer receives the invoice but misses the due date. Instead of receiving payment as expected, they end up paying you 30 days late. The money you were counting on to support your business operations isn’t in the bank. You may end up having to borrow money to cover your own financial obligations. This can become a vicious cycle, especially if you have more customers that pay late. Not to say that this will happen, but it can happen.
Invoice payment terms can also influence your customer relationships. If you send an invoice too soon with due upon receipt terms, the customer may get annoyed. On the flip side, if you give them all the time they need, you may never get paid. If you accept a deposit and invoice customers at different phases of the project, your customer’s nonpayment at one stage can also slow down the project or bring it to a halt. You need to find the right balance when choosing your invoice terms.
Consider these factors when choosing your terms…
When it comes to choosing invoice payment terms, what works for one business and their customers may not work for another. If a customer has a good payment history, you may not need to ask for a deposit though you would for a brand new customer. For more expensive jobs, you might consider billing in installments with 30/60/90 terms. Maybe your operations require Net 15 payment terms to facilitate healthy cash flow. Certain factors must be taken into account when determining what is best for your business’s financial situation.
Historically, what has your experience with the customer been like?
If you’ve done business with the customer before, you can base your terms on your experience. Do they pay on time? Are they always sending late payments? Do they still owe from a previous invoice? Depending on the experience you’ve had with the customer, you may want to require upfront payment on the invoice or maybe set a shorter deadline for payment. If things have been going well with Net 30 terms, for example, it may be a good idea to keep things as they are. If it isn’t broken, why fix it? The overall goal with selecting the best invoice terms is to get paid on time and as quickly as possible.
Working with new customers, however, is always accompanied by some degree of uncertainty. You can feel out the situation with a new customer by asking for payments at different phases of a project (i.e. once a milestone has been reached) or by asking for a deposit upfront. This will also demonstrate to your customer that prompt payment is important to your business.
How much is the invoice worth?
The smaller an invoice is, the less time you want to spend chasing payment on it. If an invoice amount is less than $500, requiring immediate payment or placing Net 10 or Net 15 terms on it may be most appropriate. Larger invoices, on the other hand, may warrant a longer deadline because the customer needs time to come up with the funds to pay. Always consider the invoice amount when determining the payment terms.
Should you add late fees or interest charges?
You may consider adding late fees or interest charges to your invoice terms to encourage your customers to pay on-time. If you do, you’ll need to clearly spell this out on your invoice payment terms. You’ll also need to enforce the fees and follow up on delinquent invoices by sending a friendly payment reminder to customers.
Will early payment discounts get you paid faster?
If you want to encourage certain customers to pay sooner, you can offer early payment discounts. Early payment discounts offer an incentive to customers to pay you before the invoice due date. Most Net 30 or longer invoices incorporate early payment discounts. For example, an invoice may have 2/10 Net 30 terms. This means that if a customer pays you within 10 days on a 30-day invoice, they get a discount of 2% off the total invoice amount. The customer’s early payment helps reduce gaps in your cash flow and meet your own financial obligations. The customer is also able to save money, so it’s a win-win.
What payment methods should you accept?
The due date stipulation and late fees and interest charges are only a portion of your invoice payment terms. Your terms should also include what payment methods your business will accept. Payment methods can be accompanied by associated expenses and some degree of risk. By accepting credit card and PayPal payments, you’ll have to deal with service fees. However, customers will likely pay sooner because of the convenience. Also consider that if you accept check payments, you’ll have to physically handle the deposit and take on the risk of the check not clearing. Large companies sometimes opt to mail checks as payment, so by not accepting checks, you may alienate a potential customer.
Use caution when determining your accepted payment methods, keeping in mind cost, risk, and customer expectations. Try to retain enough flexibility that you’re not deterring certain customers, while also keeping your business’s fiscal health top of mind.
What are the most common invoice terms?
If you invoice your customers, there are some common terms and definitions with which you should be familiar. Here is a helpful chart to help guide you through the pros and cons of each type of payment term:
Choosing the right invoice payment terms is essential for your business accounting processes, as it can be the difference between positive cash flow and a cash flow crisis. Invoice payment terms not only regulate your business’s cash flow, but they can also impact your customers’ payment habits. The best invoice payment terms are the ones that provide enough cash to keep your business operating smoothly while still satisfying your customers’ needs and expectations. An accountant or bookkeeper can run some scenarios to determine how different payment terms will impact your cash flow. Contact us to schedule a consultation to see how we can help you choose the best terms for your business.