When writing an invoice, there are several things that small business owners need to consider. In addition to including your company information, an invoice number, and invoice date, you’ll have to ask a few questions. How and when would you like to get paid for your service? Will you charge fees on late payments or a certain percentage of the bill upfront?
Your answers to these questions will help you create your invoice payment terms. These terms will have a big effect on the time it takes you to get paid, how your customers interact with you, and your overall revenue.
You may even want to have different payment terms for different customers. Factors like the amount of business you’ve done with a customer, the size of their bill, and their credit history can influence the way you invoice them.
With the right payment terms, you can increase the chances you’ll be paid on time and fairly for your services or products. Still, creating invoices can be tedious. Skynova’s free invoice template makes the process of creating professional-looking, quality invoices a breeze.
The Standard Payment Terms for Any Small Business
There’s a variety of payment terms that a small business can use when invoicing. Aspects like the size and nature of your business will influence which terms work best for you. Certain types of companies also have common payment terms that customers may expect. Keep in mind, though, that you can adjust your payment terms to meet the needs of certain customers or protect yourself from the risk of dealing with someone with poor credit.
Your payment terms may even evolve. Some companies have shortened the time they’re willing to wait for payment in recent years. With the advancement of cloud technology, small businesses can share invoices online, and customers can make online payments as soon as they receive the invoices.
1. Terms of Sale
The "terms of sale" for your invoice are payment agreements you make with your customer. You’ll have to agree on the cost of your service, the forms of payment you’ll accept, how the payment will be made, and which party will pay for things like taxes and shipping.
Certain types of businesses have customary terms of sale. Make sure to research the customary terms of sale for your business. For example, businesses that make physical goods usually use "Net 30" (payment is due 30 days after the invoice is received) as their payment time frame. In comparison, construction companies may have terms longer than 30 days. Freelancers can pretty much decide their own terms of sale.
2. Payment in Advance (PIA)
"Payment in advance" (PIA) is a common practice. It means that a customer must pay you in advance for the service you’re rendering. One situation where you might consider using PIA is to buy products to complete a job. You might be a painter and need materials like brushes, paint, and rollers. The advance pay would cover the cost of your supplies so that you’re not out-of-pocket.
You might also use PIA terms if you’re working on a large job that will take a long time. You can ask for the entire payment or a portion of the payment in advance. If you’re a construction contractor and have been tasked with erecting an office building, you’ll need payment to hire any independent workers you’ll need to finish the job.
You can also use the terms "cash in advance" (CIA), "cash before shipment" (CBS), "cash with order" (CWO), or "cash on next delivery" (CND). With these arrangements, you not only require your customer to pay in advance, but you also require them to pay you in cash. Requesting cash in advance protects you from the risk of accepting credit.
3. Immediate Payment Upon Receipt
The term "immediate payment upon receipt" means that payment is due when a seller delivers a good or performs a service. If the customer doesn’t pay when the item is delivered, the delivery person will take the item back.
This model is used for smaller businesses trying to engender trust with their customers while not taking on credit risk. Sometimes, a seller will request cash on delivery (COA), which saves on the processing fees that can come with accepting credit card transactions or checks.
4. Net 7, 21, 30
If the payment term is the word "Net," followed by a number, that’s the number of days after the invoice date that payment is due. "Net 30" is one of the most popular payment terms, but you can also use "Net 21," "Net 7," or any other amount of time.
However, using the term "Net" can be confusing to a buyer, so it can benefit you to put a concrete due date on your invoice instead. For example, if you send your invoice on Nov. 30 and request payment on a Net 30 basis, you might want to indicate that the actual due date for payment is Dec. 30.
Skynova’s invoice template has a "Notes" section that lets you explain terminology like "Net" that may confuse customers.
5. 2/10 Net 30
This payment term offers a buyer an incentive to pay early. Net 30 indicates that the payment will still be due in full after 30 days. However, the "2/10" means the buyer will receive a 2% discount if they pay their invoice in full within 10 days. Of course, you can replace these with any numbers you’d like. For instance, "3/7 Net 60" would mean the full payment is due within 60 days, but if the customer pays in seven days, they will receive a 3% discount.
For large charges between businesses, the discount can be an offer a buyer can’t refuse. Some customers might not be familiar with the term "2/10 Net 30," so it’s important to write it out when you’re invoicing. Include in your invoice a note that says something like, "Please complete your payment in 10 days to receive a 2% discount."
6. End of Month Payment (EOM)
If you use this term, payment is due at the end of the month (EOM) that your invoice is received. However, the term "15 MFI" ("month following invoice") means that payment is due on the 15th of the month the invoice is received.
Be cautious using this payment term for larger charges. You don’t want a customer to feel you’re rushing them. If a customer is used to paying for services on a Net 30 basis, they might not like that you’re asking them to pay in less than a month.
7. 50 Percent Upfront
This is a type of PIA term in which half payment is due before work on a project or service can take place. This payment method is used by businesses performing large jobs that can take months or years. It helps a business’s cash flow while working on a long project.
This kind of agreement can be beneficial for both the seller and the buyer. For example, a window installer is hired to replace all the windows in an elementary school, but the school administrators decide to cancel the job after only a few days. The installer has already received a down payment, so the project isn’t a total loss for them, and the school might be able to avoid further charges (depending on the contract they have with the installer).
8. Line of Credit Payment
This term allows for customers to purchase goods on credit. A buyer will make payments for a good or service over time, usually in monthly or quarterly installments. Large, established companies often use this type of payment term.
Smaller companies can’t afford the risk of accepting credit for payment. While this payment term allows large businesses to operate more efficiently, it can slow down cash flow for smaller businesses.
9. Recurring Invoices
Recurring invoices are used for services that must be paid in intervals. This type of invoice is used for things like web hosting or other subscription services. Customers pay a certain amount each month for a service.
Because these invoices are always the same, you can reuse them every month, which saves time. They are also good for keeping a company’s cash flow going, as payments repeatedly come over a set period.
10. Interest Invoices
This is the term you’ll have to discuss with your customer before deciding to do business with them. Interest invoices come into play after the customer is already late in paying their original invoice. In addition to the initial payment due, interest will accrue and be added to the customer’s debt. Remember that you’ll only charge interest on the number of days after the original due date. It can also be courteous to follow up with your customer before charging interest to ensure no misunderstandings keep them from making payments.
You may charge a 3% interest rate in late fees for an invoice of $3,000. If the invoice is 10 days late, you’ll divide 10 by 365, multiply that by .03, and multiply that by 3,000. The charged interest would be $2.47 for the 10 days. Depending on the cost of the initial bill and how many days of the invoice date that the customer is late, these charges can get expensive.
While it’s up to you how much interest you charge, different states have different laws regarding the maximum interest rate. Make sure to check the laws in your state before charging interest. Typically, interest rates on invoices run between 1.5% and 3%. You should recalculate the interest due every month and send a new invoice.
If it’s been a long time, and the customer still hasn’t paid, you might have to send the invoice to a factoring company. An invoice factoring company will pay you as much as 85% of payment on that day. The company will then seek payment in the total amount due from your customer. However, invoice factoring does come with its own fees.
Best Practices for Invoice Payment Terms
Getting paid for your work on time can be tricky, but it’s essential for business owners to have a steady cash flow. Below are some tips for setting up your invoice payment terms. These will help make getting compensated for your full invoice amount as smoothly as possible.
Word Terms Politely and Professionally
Even though an invoice is a professional document, polite phrasing can go a long way in ingratiating yourself with your customer. Words like "please" and "thank you" help your customer see you as a human rather than just some bill that needs to be paid. They’ll want to extend the same courtesy back to you by paying you on time.
Set Clear Deadlines and Due Dates
Always use clear terminology for deadlines and due dates on your invoices. Some customers won’t understand terms like "Net 30" or abbreviations like "EOM." You want to make sure everything on your invoice is as clear as possible to decrease the likelihood of misunderstandings that could delay your payments.
Use clearly worded phrases like "Payment is due on Dec. 12, 2020," or "Payment is due in full by the end of October 2022." This is especially important if you deal with individuals as opposed to businesses. They might not have as much experience with invoice terms as professionals.
Include Late Fees
Unfortunately, not every customer will want to pay your invoice because it’s the right thing to do. Adding a late fee to a customer’s bill can greatly influence them to pay you on time. However, you need to clarify any late charges with your customer before doing business. If you don’t, you could offend your customer or even ruin your business relationship if it’s a long-time customer.
Remember that every state has a maximum amount of interest you’re allowed to charge on an invoice, but usually, you’ll want to charge around 1.5% to 3% interest on late invoices, and you’ll only be charging interest on the number of days the invoice is late. For each month that an invoice is late, rework your math and send a new invoice for the current amount due, given the new interest.
Accept Multiple Payment Methods
There are a variety of ways that customers can make payments to you. Payment options include cash, check, credit or debit card, PayPal, automated clearing house (ACH) transactions, monetary financial institutions (MFIs), and even bitcoin. The more ways you allow a customer to pay, the better your odds of getting paid on time.
However, customers and businesses tend to have preferred payment methods and can put off payments that need to be made by a different method. For example, you may have a customer used to making payments by credit card. When a charge comes in, they go online, type in their card information, and press enter. If you only accept checks, they might not like having to write the check, put it in an envelope, and mail it.
If you’re having trouble collecting payment, it might be wise to ask your customer if they’d like to pay differently and see if you can accommodate it. Having multiple ways that your invoice is payable will help you collect much easier.
Reward Early or Full Payment
Everyone likes payment discounts. A reward for early payment can be a great incentive for your customer to pay on time. Payment terms like "2/10 Net 30" are great ways to get paid early. Getting paid early helps your business maintain a steady cash flow.
Always state any rewards or discounts clearly in your invoice. Include a note with your invoice that says something like, "Full payment Oct. 1, 2022, but pay by Sept. 10, 2022, for a 2% discount!" Depending on the amount a customer owes you, these types of discounts can make a huge difference over time.
Include Exactly What They’re Paying for
A possible reason that you might have nonpayment is that a customer doesn’t understand what they’re being charged for. This can be an issue when dealing with the accounts receivable department of a business. A company’s financial team can be meticulous in making sure they aren’t overcharged and that they can record every charge in the right debit or contra account.
Make sure your invoice clearly identifies separate charges for things like labor, the cost of materials, and consultation time. Not only are customers more likely to pay you on time if they fully understand what they’re paying for, but you’ll also save a lot of hassle going back and forth trying to explain everything to them.
The Importance of Payment Terms
Your payment terms can have a big impact on the amount of money a new client will make your company. They can also affect the rapport between you and your customer. It’s important to set up payment terms that maximize the likelihood you’ll get paid on time and allow positive relationships to develop.
Setting your payment terms is a balancing act. If your payment terms are too strict, your customer won’t feel valued or trusted, but if your payment terms are too lenient, certain customers will take advantage of you.
It can be incredibly frustrating dealing with customers with past due bills. It can even cost you money in fees for things like factoring companies and collection agencies. Taking the time to decide what payment terms are best for your business will ensure that you receive prompt payments and always have a steady flow of income coming your way.
Create a Professional Invoice With Skynova’s Sales Invoice Template
Creating invoices from scratch can be complicated, time-consuming, and, most of all, tedious. Skynova can help. Our free invoice template is easy to use and can help you crank out invoices rapidly and with ease.
We also have templates for things like quotes, bids, estimates, and everything you need to handle the financials of your business. We make getting paid for your services as simple as possible, so you can focus on doing what you enjoy and making money.
We also offer software products that can handle things like subscription invoices, credit notes, and retainers. Our goal is to make building your small business and increasing your revenue as easily as possible.