What Are the Best Invoice Payment Terms for Your Small Business?

Invoice payment terms determine how long you have to pay a business for goods or services. There are a lot of factors that go into choosing the best invoice payment term, so this is not an easy decision for businesses with small budgets.

When you choose the incorrect invoice terms, you risk disrupting your cash flow and alienating your clients. However, it might be tough for a new entrepreneur to know what conditions to set in order to be paid quicker and develop strong connections with clients. When it comes to picking the correct invoice terms, your sector and customer history are crucial.

Industry-Specific Invoice Terms

The golden rule of invoicing is to be paid as quickly as possible. The normal billing term for small enterprises is Net 30. It simply implies that the consumer has 30 days to pay you after getting the invoice. To be paid quickly, small company owners may be tempted to charge a customer at Net 15, Net 7, or even cash on delivery, but this is dangerous.

If you’re getting criticism from clients over your invoice conditions, it’s typically because you’ve gone too far outside of industry norms. You’ll need to chat with industry peers and learn the conventions in your business before deciding on your invoice terms.

Three Types of Small Businesses and Their Payment Terms

Payment terms may be uniform across the board or vary based on the size and duration of the contract, depending on your sector. If your company operates in an industry where Net 30 is the norm, you won’t have as much freedom as a freelancer.

Small companies are divided into three categories: first, they may provide the same payment terms as firms in related sectors; second, they may offer a limited variety of terms; and third, payment terms for enterprises in the same industry may vary substantially. We chatted with Edward Castao, Vice President of Marketing at invoice finance provider BlueVine, for more information. He noted that invoicing periods vary widely by industry, but that small enterprises may be divided into three groups.

When it comes to determining payment terms, small enterprises fall into three categories:

1. NET 30 terms are always available: practically all makers of tangible consumer items, for example, provide NET 30 terms.
2. Net 30 to Net 60 terms are available: NET 30 and NET 60 are the most popular terms in the fashion and construction sectors, for example.
3. Freelancers; some need up-front payment, while others don’t mind waiting 60 days or more for payment.

You must do research to discover the optimum invoice terms to give your clients in order to guarantee that your bills are paid on time. Setting the correct payment terms up front guarantees that you get paid sooner, which may help you keep your cash flow positive.

Things to Consider When Selecting Invoice Payment Terms

When it comes to invoicing payment terms, there is no “one-size-fits-all” solution. It’s possible that what works for one consumer won’t work for another. You may not need to ask for a deposit ahead if a customer has a strong payment history, as you would with a new client. Consider invoicing in installments for high-value work.

The following are some suggestions to help you determine the ideal invoice terms for your business:

Client’s Background

When it comes to paying your debts, actions speak louder than words. You may check a client’s company credit record to see how they’ve paid their payments in the past. If the analysis reveals that they’ve been late with other suppliers, you may wish to request advance payment on the invoice or impose a tight payment deadline.

Even if a potential customer has an excellent credit score, there is always some amount of uncertainty when dealing with a new client. You may test the waters with a prospective customer by requesting payments at various stages of the project if a milestone has been met, or by requesting a deposit upfront.

If you’ve previously done business with the customer, you may base your conditions on that experience. If you’ve been having success with a Net 30 system, it could be a smart idea to stick with it. This is due to the fact that there is no reason to modify what is functioning. The ultimate aim of choosing the finest invoice terms is to be paid quickly.

Invoice Dimensions

You don’t want to spend too much time hunting down payment on a minor invoice. If an invoice is for a few hundred dollars or less, requesting quick payment or a NET 10 deadline may be the best option. Larger bills may warrant a longer deadline if the customer needs more time to pay.

Consider requesting an advance deposit if you’re working on a significant project with a new customer to lessen the chance of nonpayment.

Michelle Messenger Garrett, the proprietor of Garrett Public Relations, presently performs the following:

Garrett adds, “I usually use ‘Net 30’ and it’s always worked quite well for me.” “However, some customers are late payers, so I’ve started charging for a portion of the cost advance more lately, particularly for bigger tasks.” That manner, you may create your expectations of getting paid on time straight immediately.”

Late Fees & Interest

Finally, to enforce your payment expectation, try including late penalties or interest rates in your invoice conditions. Past due bills are often charged a late fee of 1.5 percent to 2% of the invoice amount. The key is to examine your Accounts Receivable Aging report on a weekly basis and to follow up on late bills by sending clients a courteous payment reminder email.

If you are unable to contact your consumer, you may need to go to the following stage and write a collection letter to demonstrate that you are serious about receiving payment. We offer a template and some ideas in our collection letter guidance on how to be paid quickly and avoid sending a customer to a collection agency.

How to Use Invoice Terms to Get Paid Faster

In order to keep a client, you may have to offer them lengthier payment terms than you would prefer. You may provide early payment incentives to encourage select clients to pay immediately. If other clients need additional time to pay, you may continue to offer Net 30 terms and employ invoice factoring to make up the difference in funds.

Discounts for Early Payment

Discounts for Early Payment offer an incentive to customers to pay you before the invoice due date. Most NET 30 and longer invoices are coupled with Discounts for Early Payment. For example, if a customer pays you within 10 days on a 30-day invoice, you might give them a 2% discount. On the invoice, this would be noted as 2/10–Net 30.

QuickBooks makes it easy to offer Discounts for Early Payment to customers. When you create customers in QuickBooks, you can select the payment terms for all invoices. Assigning payment terms will allow QuickBooks to send you an alert when invoices are coming due. You can send a reminder email to customers to ensure invoices are paid on time.

A screenshot of an invoice prepared in QuickBooks with early payment conditions may be seen below:

Using QuickBooks, build a sample invoice with conditions for early payment discounts.

Discounts for Early Payment are a win-win. They help you get paid sooner so you can reduce gaps in your cash flow and meet your own financial obligations. They also keep the customer satisfied by saving them money.

Invoice Factoring & AR Financing

Selling (or allocating) your customer invoices to an invoice factoring business is the traditional method of invoice factoring. It’s a financing option for firms that may need $10,000 or more per month in finance. However, invoice finance firms are now available. They will not contact your customers, and they may continue to write cheques or make electronic payments in your company’s name.

The Importance of Invoice Terms

When it comes to invoicing payment conditions, there’s a lot on the line. They set the tone for your future client relationships and have a financial impact on your company. When selecting what invoice terms to give, you must consider the industry norm, the client’s payment history, and the potential income the task would generate.

The financial ramifications may be worse than you realize. If a client pays 30 days late, for example, you may need to borrow money from a factoring business to satisfy your own commitments. On a monthly basis, the expense of doing so is often about 4% or more. As a result, if a client pays a $10,000 invoice 30 days late, it’s the equivalent of losing $400.

The conditions of your invoice payment have an influence on your customer relationships as well. Clients will be irritated if you charge them too soon. Give them all the time they need, on the other hand, and you could never see a dime you’re entitled to. If you charge customers at various stages of the project, a client’s inability to pay at one time might cause the project to slow down or even come to a stop. When it comes to establishing your invoice terms, you must strike a cautious balance.

Frequently Asked Questions (FAQs)

This section contains the most commonly asked questions concerning invoicing terms.

What are the payment terms?

The length of time granted to a buyer to pay off the amount owing is referred to as terms of payment. It might be a cash-on-delivery (c.o.d.) deposit or a 30-day or longer delayed payment. Net 30 is a common invoice word that signifies payment must be made within 30 days after the invoice date.

When does an invoice have to be paid?

The interval between when clients get products and services and when an invoice is due should be 30 days in most cases. It may, however, change depending on a number of things. Standard words are used by the majority of firms in certain sectors. The payment history of a client as well as the invoice amount should be taken into account.

Conclusion

Choosing your invoice terms doesn’t have to be rocket science. Following the tips above will help put you on the right path. If customers are still taking longer to pay you than you’d like, consider making Discounts for Early Payment or invoice factoring part of your invoicing solution to firm up your business’ cash flow.

Payment terms are the conditions that a business agrees to in order for someone to pay for an item. The payment terms you choose will depend on your business’s needs, but there are some standard terms that can be good options.