Most of you are aware of what invoices are, but very few know about the payment terms that businesses should use in their invoices. The invoicing terms are generally known as terms for payment. Such payment terms should be included in the billing cycle that small businesses usually send while they invoice clients. These payment terms indicate how quickly service providers are expecting the due payment and the conditions for different payment methods clients can use. It is used to give businesses better control over their cash flow and also help them plan future expenses.
What You'll Learn
- 01Understanding invoice payment terms and why they matter for cash flow
- 02Common payment terms used by businesses (Net 30, COD, PIA, etc.)
- 03Best practices for setting payment terms and getting paid faster
- 04How to handle late payments and unpaid invoices
- 05Modern invoice management solutions for small businesses
What are Invoice Payment Terms?
Payment terms are a set of conditions under which you inform your users about:
-
When to pay
-
Offer them different payment methods to pay
-
Due date
The payment term in the invoice even includes the penalties for late payment. If your payment terms are clear and precise, then there are chances of getting it approved and paid.
Other than invoice payment terms, you must also include a few things under invoices.
For instance, an invoice number for you and your customer's reference. Plus, it helps you track payments. Another crucial piece of information to add is the contact details. This will help customers contact the concerned person if there is any dispute between them and your employees.
Common Payment Terms
| Payment Term | When Payment is Due | Best For |
|---|---|---|
| PIA (Payment in Advance) | Before delivery | High-risk transactions |
| Net 30/60/90 | 30-90 days after invoice | Standard business terms |
| COD (Cash on Delivery) | At delivery | One-time transactions |
| 2/10 Net 30 | 2% discount if paid in 10 days, otherwise 30 days | Encouraging early payment |
| EOM (End of Month) | Last day of month | Monthly billing cycles |
Complete Payment Terms Glossary
Payment Terms
Description
PIA
Payment in advance
EOM
End of month
21 MFI
21st of the month following invoice date
Net 7, 10, 15, 30, 60, or 90
Payment is expected receive within 7, 10, 15, 30, 60, or 90 days post the invoice date
CND
Cash next delivery
COD
Cash on delivery
CIA
Cash in advance
CWO
Cash with order
1MD, 2MD
Monthly credit payment of full month or two supply
CBS
Cash before shipment
Forward Dating
Preparing an invoice in advance for the order to be delivered in the future
Stage Payments
Make your customer agree upon the payment and set it over time period
Partial Payment Discount
Due to low cash flow, seller sells goods at lower price
Rebate
Refunded to the buyer post-purchase
Contra
Payments settled against office supplies purchase
Accumulation Discounts
Discount on bulk orders
Important Payment Terms
Get to know an estimated amount to be credited to your bank account with the help of payment terms. It will also help you project the upcoming cash flow to business.
Due to not adding payment terms to invoices, it has been found that:
- 4/5th of business owners are worried about their company's cash flow
- Most of all sole proprietors claim cash flow to be an obstacle for business operations
- More than 60% are unaware of the income in their business
- Cash flow is also one of the affecting factors in decision making process
A smooth cash flow results in planning for taxes, maintaining business operations, and ensuring a competitive edge. Creating accurate invoices with professional touch ups increases the chances of getting paid faster. Besides, attaching all the payment terms in the invoice maintains transparency.
Penalties for Unpaid Invoices
As a businessman, you need to make sure that the invoice terms of sale you are using are enforceable. Just like that, you should also include late fees or penalties for unpaid invoices or past due invoices. This late fee will let the clients know they will be charged an extra invoice amount as late payments charges. Charging late payment fees for past due invoices is good for all small companies because it will help them higher the percentage of paid invoices without a payment reminder and it will be a win-win situation for them.
You must be thinking about how much the late fee should be? Well, usually companies charge 1.5% to 3% interest charges per month as a part of their late payment charges. If you follow invoicing tips and invoicing tricks, make sure that you should have late payments' charges within your interest invoice payment terms examples and are in accordance with your country and state laws.
What Are the Best Tips and Tricks for Invoicing Terms?
The best payment term and payment policy for invoices is the one that helps you get paid faster even before your payment is due and keeps your money flow running. Some of the best practices for invoice payment terms are:
Polite Words for Your Payment Terms
You should be polite when writing your invoice payment terms. It is definite that customers don't like the idea of mentioning lots of payment terms and conditions, and it is not just good practice for maintaining a positive relationship with the clients. But in many cases, it helps small companies in getting paid. Little words like please and thank you can make your life much easier than you think.
Little words like "please" and "thank you" in your payment terms can significantly improve client relationships and payment compliance.
Set up Specific Deadlines
When you set up crystal clear deadlines for your payment terms and conditions it can help your business 'receive payments' faster than you think. You can always mention the number of days remaining and specific payment terms and conditions to make payments, for example, you can say your total invoice amount is due in 30 days, 60 days, or 90 days. Now, it's up to the customer how they want to make an early payment within 60 days or in 90 days. You can also include precise dates.
Short Term Payment Periods
It is advisable that as a businessman you should mention short-term payment periods on your invoices to get paid faster and in a minimum time period. Many business owners use a 30 days policy to make their clients happy but nowadays technology has made this lengthy process much easier for many business owners and clients. By using advanced technologies, clients can make payments instantly, and in a short period of time just after the invoice date mentioned in the document on the other side business owners should open their doors for the latest technologies to get paid quickly and maintain their cash flow. Just start mentioning a shorter time period to make early payment in your invoice and evaluate whether these invoice payment terms help you get paid or not.
Flexible Payment Methods
The more options you give clients for making payments, the more they are likely to make payments on time. When your client will see your invoice payment terms including taxes for choosing an appropriate method (i.e. credit cards, mobile payments, or bank account transfer), they might make the payment quickly and in the easiest way possible to maintain the cash flow. So, it is the best approach to get paid by mentioning flexible payment terms.
Early-Bird Payment Rewards
It is always recommended to make your clients happy by rewarding their efforts. You should offer them early-bird discounts including taxes using 2/10 Net 30 when they make instant payments within the invoice date or before the time period you have mentioned in your payment terms. For example, if a client makes early payment within 10 days when their invoice date is due in 30 days, you can offer them a 2% discount or credit payment under 2/10 Net 30 payment terms and as a sweet gesture. You can also define what it means and help them with the payment schedule if you are dealing with a start-up business.
Common payment term challenges among small businesses
Setting up the payment infrastructure comes with a cost and a few challenges. Considering all of them, we have curated a list of challenges and ways to overcome them.
Due Invoices
Small business owners are severely hit by unpaid invoices due to which many business operations remain on hold. To make your business run smoothly, you must add payment terms to invoices and penalties for late payments.
Other than this, invoice factoring and previous payment collections are two ways to avoid late payments.
Track Invoices and Manage Payment
Business size may also become a hurdle when dividing funds to different divisions within the organization. You may be able to overcome the challenge by adopting invoicing software that only creates invoices but also allows you to add payment terms to it.
Secured Payment
Online payment never gets obsolete and with that new payment platforms emerge. But not all of them are safe and secure. To avoid what-if situations, you must choose a secured online payment platform. Having invoicing and estimating software with integrated payment gateways and other different channels, you can win the trust of your clients.
Streamline Your Invoice Payment Terms
InvoiceOwl helps you create professional invoices with clear payment terms, multiple payment options, and automated reminders to get paid faster.
Try Free for 3 DaysInvoice Management for Modern Businesses
Invoice management has become a mainstay in most companies to manage their cost, just like every other financial transaction. Most finance departments of a business cannot cope with the influx of invoices that come in on a daily basis, in different formats.
Companies pieced various invoice processes, and although they had the best intentions, they made life a little harder for everyone. Invoices were the best short-term solution at the time.
Until there aren't.
Double-handling and data entry are a thing of the past. It's time to move beyond all those aspects of invoice management that reduces the effectiveness of your business. In this section, we'll give a detailed explanation.
Before we proceed, a quick clarification.
Invoices and Accounts Payable (AP)
Invoices are usually treated as important components of the account payable procedure in large businesses. AP ensures that the suppliers are paid and get money on time, and you'll be able to receive the goods or services needed by your company.
As we discussed earlier, AP teams work in conjunction with other staff to ensure the company's needs are satisfied. This includes accounting software, freelancers and consultants, and of course, raw materials. All of the mentioned require invoices to be paid.
Theoretically, the accounts payable team helps to hunt discounts, improve supplier relations, and also explore different businesses to partner with.
Whereas in reality, AP teams spend most of their time fixing errors made by others in the procedure and sometimes on data entry.
In the absence of a competent AP team or manager, the finance experts or office managers must do all this work. Trust me; these people have other things to do.
Most growing small businesses have this issue. They might have a large number of invoices for the procedure, but they don't have a specialized team to handle all of them.
Whether you operate a small or big business, there are chances you're suffering from the same issues as old-fashioned processes. This is quite a change because invoice management has evolved.
How Invoice Processing Should Look Like in 2022?
Smart companies look for ways to cut out two things:
- Manual data entry usually takes a lot of time and is error-prone; and double-handling irrelevant communication. Having to send invoices through the mail from place to place can be very annoying.
- Invoice automation is the way out. Instead of sending PDFs around the company for validation, the point-of-contact can easily input the data into a platform or tool once they receive it.
Here's how that would look:
Some tools even give the supplier an opportunity to input their invoice data into your software directly. They don't need to create and attach any PDF file – you will get the raw data.
Frequently Asked Questions
The most common payment terms include Net 30 (payment due in 30 days), Net 60, Net 90, COD (Cash on Delivery), PIA (Payment in Advance), and 2/10 Net 30 (2% discount if paid within 10 days, otherwise due in 30 days). Each serves different business needs and risk levels.
Most companies charge between 1.5% to 3% interest per month as late payment charges. However, you must ensure your late payment terms comply with your local and state laws before implementing them.
Your payment terms should include the invoice date, outstanding amount, payment due date, any advance or deposit received, payment plan options if applicable, accepted payment methods, and penalties for late payment.
You can encourage faster payment by offering early payment discounts (like 2/10 Net 30), setting shorter payment periods, providing multiple flexible payment methods, using polite but clear language in payment terms, and sending automated payment reminders.
Net 30 means payment is due within 30 days of the invoice date. 2/10 Net 30 offers a 2% discount if the invoice is paid within 10 days, otherwise the full amount is due within 30 days. This incentivizes early payment.
Yes, invoice management software can help you track invoices, set up automated payment reminders, accept multiple payment methods, and maintain better cash flow visibility. Modern systems can even automate data entry and integrate with accounting software.
