Sometimes, businesses may accept partial payments on invoices. These circumstances may relate to orders where an upfront fee is required, followed by payment of the balance upon delivery, or they may be linked to other agreements. Agreements are often made between the service provider and customer and are considered a good business practice.
Learn more about what a partial payment is, why business owners accept partial payments on invoices, and why it can be advantageous to make this type of arrangement. This article also shows how you can use Skynova’s invoice template to create your partial payment invoice.
What Is a Partial Payment?
A partial payment means that the customer only pays a portion of the total amount reflected on the invoice. The terms of the partial payment are typically agreed to before an invoice is generated. A deposit reflects goodwill on the customer’s part and safeguards the business owner from providing goods or services based on fraudulent orders. The amount of the deposit is usually half of the payment amount owed.
After the business provides the service or product, and the customer is satisfied with the goods or services delivered, the remaining amount of the total cost must be paid by the due date. Partial payment invoices are commonly divided into two payments but can be broken down into more, depending on the agreement made at the start of the transaction.
Why Would a Company Accept a Partial Payment?
Partial payments are accepted in an array of situations. For example, a business will issue a partial payment invoice for a sales order. In this case, the customer would make a deposit when placing an order. This deposit may be required to secure delivery or pay for the materials needed to fill the customer’s order. Once the service or good has been delivered, the remaining balance will become due. Alternatively, the customer may agree to partial payment to ensure the work is completed on time.
A company will also accept this arrangement when an installment payment agreement is mutually beneficial. This type of arrangement is often made for expensive items, such as car purchases, furniture, or appliances, or when borrowing money over an extended period. Because these products are costly, it is in the best interest of the business and the customer to have a partial payment plan in place. The lender or company will typically decide on an interest rate to add to the amount due to minimize ongoing payment risks when payments for goods or services are agreed to in the long term.
Other circumstances in which companies accept partial payments relate to property purchases. A percentage of the overall price will be set for the real estate, and the balance will be paid over a predetermined period via a mortgage loan. The same concept applies to purchasing partnership shares in a business, merging a business, or accepting a business takeover agreement.
Benefits of Partial Payment Invoices
Partial payments should be beneficial to both parties; otherwise, businesses and freelancers won’t want to engage in this practice.
Some of these benefits are designed to inspire customers to make regular payments on time. Other payment arrangements help secure upfront or ongoing payments by delivering services or materials in increments, such as construction jobs. Other benefits allow customers to make expensive purchases and pay for these over longer periods, which they may not have been able to afford if the products required once-off payments in full.
The following are a few benefits of creating partial payment invoices.
Financial security is vital to the long-term success of businesses. Issuing partial payment invoices ensures a level of security when requiring a customer deposit for a specific offering. For example, when the customer puts down a 10% deposit for an expensive purchase, such as a home, car, or another item, it shows a level of commitment to paying the balance later as agreed.
Although a deposit is not a guarantee of future payments, it does provide some security for the company because it can cover the cost of materials. For example, a small construction company may require the customer to pay a deposit and use that money to buy materials to do a job. If an agreement to pay labor costs over three months has been made, and the customer doesn’t honor the first payment, the construction company can stop work until the customer makes payment. Only once the first payment for labor costs has been received will the construction company continue with the work.
The customer is encouraged to make payments because it is unlikely that they will want to live in a house where construction work is incomplete. In this way, the construction company has a level of security from the deposit paid because they did not pay for the materials themselves. The company may lose out on one month’s worth of labor if the customer doesn’t make a further payment. Still, at least the business owner knows that the customer is likely to meet their payment obligations to avoid living in an environment where the work is unfinished.
Small business owners can use the "Notes" section of Skynova’s free invoice template to clarify or confirm payment arrangements with their customers.
Collect on Overdue Invoices
Business owners can use partial payments to claim on past due accounts. Rather than reporting late payments and nonpayments to the credit reporting bureaus, they can help keep a customer’s credit score clean by offering them a way out of their financial situation.
Simultaneously, an installment plan that reduces the monthly payment can help customers pay off the total amount outstanding. This is a win-win situation and can help maintain good customer relations.
Interest rates should be clearly stated on the bill for overdue payments, and the business owner must set deadlines that the customer should stick to. Business owners can use Skynova’s free receipt template to formally acknowledge each payment and even track all transactions with accounting software to enhance business processes.
Better Cash Flow
Requesting a deposit at the start of a transaction gives the company money to purchase materials to begin a job or guarantee the delivery of goods. Whatever type of trade the company is engaged in, deposits or retainers improve cash flow because the customer’s money is used instead of their own.
Construction companies and others that make purchases to provide customers with a service often use this method. In other words, many of the overheads required to complete the job are paid for upfront, with only labor costs being left to pay for at a later stage. Construction companies and similar businesses also use a bill of materials to inform their customers of the costs of supplies required to complete a job, followed by issuing a partial payment invoice before starting a job.
Improve Customer Satisfaction and Retention
Loyal customers are often the result of significant investments made to attract and maintain their loyalty, so every effort must be made to keep them happy. Allowing customers to make partial payment is one way to improve satisfaction and retain their business. This is especially true when customers maintain a positive credit score, which indicates their reliability in meeting their financial commitments.
Looking after existing customers is cost-effective compared to attracting new customers. This is why partial payment is used to improve profits by encouraging ongoing purchases from happy customers.
Skynova’s free invoice template provides small businesses with various features to manage partial payments that promote customer service and retention, particularly when their credit report indicates they are reliable payers.
Providing goods and services on a partial payment basis is a good way to increase sales. Customers will typically make extra purchases when they can pay off the total expense over a longer period.
Further, customers tend to purchase higher-priced products if they know these can be settled over an extended time. If payments are not made on-time, business owners can add late fees. Both strategies help to improve profits for the business owner.
Types of Partial Payment Invoice Terms
A variety of descriptions are used when creating a partial payment invoice to indicate how the business owner is prepared to accept payment. For example, a lender can state that a loan is subject to interest and a "Net 30" term. This means that the customer has 30 days to settle the amount due, which may be subject to interest during this period, or the interest may only accrue on past due accounts.
A business owner may specify a "50/50" term, which means that a 50% deposit is payable on receipt of an order, and the balance is due on the customer’s receipt of the product or service ("50% deposit, balance on delivery"). Other terms may include "50% deposit, 50% on receipt of invoice," "30% deposit, balance payable in 15 days," "minimum payment owing/due," or "monthly installment payable by May 30, 2020."
When the term "3% 10 Net 30" is included on the invoice, this means the customer is entitled to a discount of 3% on the total owing if the full amount is settled in 10 days from the date on the invoice; otherwise, the full amount is due in 30 days from the invoice date.
All payment terms must be clearly stated and explained on the invoice, and a disclaimer is recommended in the "Notes" section of the invoice. A disclaimer and a clear description of the terms also transfers liability of the invoice payment to the customer, ensuring they must take responsibility for payment in line with the terms, or the agreement will be breached.
It is also important to note that partial payments are not considered late if an agreement has been reached between the business owner and the customer. However, a partial payment is considered late if made after the agreed-upon date. Business owners can reduce late payments by getting customers to sign contracts and imposing penalties if the agreement is not observed.
Communication is critical when agreeing to partial payment arrangements.
How to Create a Partial Payment Invoice
Creating a partial payment invoice is as easy as generating a normal full-payment invoice, except that a few other elements should be considered. These elements include discussing payment terms with the customer to arrive at a mutually beneficial agreement and then capturing this agreement on the invoice for clarity. Follow the steps below to generate your partial payment invoice.
Complete the address fields, unique invoice number, invoice date, and due date, as specified earlier in this guide. Go to the drop-down menu to choose the type of goods, services, or labor billed.
Under "Description," type in the explanation for these items as you would for a full-payment invoice. Once the description field has been filled in, input a "Unit Price" and "Quantity" to arrive at an automatically calculated figure in the "Amount" field.
Discuss Partial Payment Terms With the Client
Partial payment invoice terms should be discussed with the customer before creating the invoice. Be open with customers about the types of arrangements that your business is willing to negotiate. Listen to what the customer is willing to offer and weigh your options to determine what arrangements will work best for both parties.
Always be transparent about the terms and conditions of partial payment invoices. Set specific payment amounts and dates that the customer must stick to and follow up with penalties should the customer renege these specifications. For example, late payments can attract interest or late payment fees, work will stop pending receipt of payment as agreed, or full payment will become due in certain circumstances that warrant this response.
As a business owner, you’re entitled to make whatever agreement you like within the law. Still, it’s always recommended to arrive at a mutual understanding before going ahead with partial payments.
Include Payment Details on the Invoice
Once an agreement is arrived at with the customer, the partial payment terms can be recorded on the invoice. If the total invoice cost is $200, an explanation of the partial payment can be included in the "Notes" section. Write "50% payment on receipt of the customer order," followed by "50% payment on completion of work," depending on the type of goods, materials, labor, services, etc., provided and the terms discussed.
Create a Partial Payment Invoice With Skynova’s Sales Invoice Template
Skynova’s invoice template can help professionals create partial payment invoices quickly, easily, and for free. Long gone are the days of creating invoices in Excel, Microsoft Word, or on paper, as Skynova’s software allows you to edit, print, and download your invoice as a PDF, even from your mobile app. You can also send it to your customer’s email address online — no download necessary.
With multiple templates and additional software products, Skynova can help you streamline your business process, attract customers, and speed up payments to enhance cash flow.