10 Invoicing & Payment Terms You Need to Know

Updated on May 11th, 2022
10 Invoicing Terms You Need To Know

Key Takeaways

  1. We believe the most important terms to know are: Terms of Sales, Net 7,10,30,60,90, Interest Invoice, and Quotes & estimates
  2. Having a deeper understanding of invoicing terms helps people better understand cash flow and financial processes for freelancers or companies.
  3. The success of businesses may depend on invoice payment terms
  4. Having clear payment terms and agreements will provide less complicated payment schedules and greater client relationships.

Regardless of the industry or size, businesses require regular cash flow from their clients and the customer to pay their expenses, such as their employees’ salaries and utilities. That’s why invoicing and knowing invoicing terms is a necessity. Without these bills, there is no compensation for services rendered or products sold. That means that you won’t be able to handle your expenses.

However, your invoice is only as good as the “payment terms and conditions” that you include. Without invoice conditions correctly stated, you can’t clearly communicate when payments are due; and other relevant information such as your preferred payment method, incentives for early payments, and consequences of late payments such as fees.

Additionally, payment terms can help businesses receive payments on a predictable schedule. Fixed payment schedules are great. You can easily create a budget and make financial forecasts to prevent cash flow problems.

In other words, the success of your business may depend on the invoice payment terms that you create when sending out invoices.

Here are the ten most relevant invoicing and payment terms

payment terms

Terms of Sale

These are the payment terms that you and the buyer have agreed on. Terms include cost, amount, delivery, payment method, and when the payment is expected or due. These are also the essential components of any invoice.

In short, it’s the expectations between the buyer and seller so that there won’t be any potential misunderstandings or disagreements because both parties clearly know what to expect, and they are satisfied with the requirements.

Terms of sale are essential in international trade since it covers when shipping occurs, who is responsible for international duties and taxes — and any other factors that the international chamber of commerce regulations has established.

Payment in Advance

Payment in advance, PIA for short, is simply a payment made ahead of schedule. It’s not uncommon for business owners to require advance payments for their products or services. For example, a freelance graphic designer may need a 50% down payment before starting a project. Advances protect sellers against non-payments and cover any out-of-pocket expenses.

For example, a freelance graphic designer may require a 50% down payment before starting a project. Advances protect sellers against non-payments and cover any out-of-pocket expenses they need to accomplish the project.

Immediate Payment

Immediate Payment

This term, which is associated with “Cash on Delivery” (COD) or “Payable on Receipt,” means that a payment is due at the same time as a product or service is delivered. If the client doesn’t make the payment immediately — whether by credit card, e-check, wire transfer, or online service payment — the seller has the right to repossess the goods of intellectual property.

While this term is beneficial for the business owner since it speeds up the payment process, it’s unpopular among some clients and customers since they’re afraid they won’t have the cash to cover the bill.

Net 7, 10, 30, 60, 90; Ways to Update Invoicing Terms

These imply that the net payment is due either 7, 10, 30, 60, or 90 days after the invoice date. So, for example, if the invoice was dated June 10 and you used one of the most used payment terms, Net 30, the payment would be expected before July 9.

Because the “net” term can be confusing to both accounts payable teams and clients alike, plan to use a word in your contracts that’s more clear, such as “Days” instead of “Net.” Furthermore, to keep your cash flow positive, use shorter terms like, “Please make payment within 10 days.”

2/10 Net 30

A term such as “Net 30” requires the client or customer to make a payment within 30 days. However, if they make payment within ten days, they’ll receive a 2% discount. Of course, you can change these terms as you like. For example, you could sweeten the incentive by offering a 5% discount for invoices paid within a week.

To receive a more significant response, however, rephrase this term so that it doesn’t confuse the client. For example, a simple phrase like, “Please pay within 10 days and save 2 percent,” will make the offer clear and concise.

Line of Credit Pay

This payment option allows clients to settle their bills over time, typically monthly or quarterly. In other words, it’s allowing the customer to purchase a product or service on credit.

The ability to pay bills over time is more commonly used among larger companies and not small-to-medium-sized businesses. This is because of the risk involved and its ability to decrease your cash flow.

Quotes & Estimates

Quotes and estimates are simply the proposed price for your goods or services. This ballpark figure allows the client to compare prices in the privacy of their own home. While this estimate isn’t the final amount you’re going to bill the client — it should still include invoicing essentials.

Standard invoice essentials include the price of your products or service, an itemized breakdown of how you’ve determined the price, and a schedule of when the final goods or services will be delivered. In addition, most invoicing platforms allow you to convert your quote or estimate into an invoice painlessly.

Recurring Invoice

A recurring invoice is an invoicing term for ongoing services. They are typically for the same amount each month, like a membership or subscription.

Recurring invoices guarantee cash flow for your business, makes forecasting a breeze, and save you time from having to invoice clients each month. In addition, this monthly payment erases some of the uncertainty in invoicing and makes your life easier.

Interest Invoice — Make this Invoicing Term Clear

When a client doesn’t pay the invoice on time, what are the consequences? One of the most common solutions is to charge interest or fees on the invoice. Remember, when calculating the interest on a late payment, you’re only charging for the number of days the payment is past due.

For example, if you charge a 6% interest rate and the invoice for $1,500 is 20 days late, you divide 20 by 365. Then multiply that result by .06 and finally multiply that figure by 1,500. The interest charge would come out to $4.93 for the 20 days.

With that in mind, an interest invoice is not only a reminder of a past due payment; it’s an invoicing term that informs the client that this invoice contains the relevant interest charges and payment date to settle the payment.

Resend these invoices every month and adjust the calculation to reflect the additional days past due.

Invoice Factoring

Invoice Factoring

What if a client hasn’t paid your invoice, and you’re desperate for cash? You could consider invoice factoring.

Invoice Factoring is the invoicing term used to hand over your invoice to an invoice factoring company. You’ll receive an 85% advance upfront in as little as one day. However, keep in mind that these companies will charge you a fee, so make sure you read the fine print.

A company like BlueVine charges a 0.5 % fee per week. Also, they’ll even allow your clients to continue making payments under your business’ name.

Conclusion – Invoicing Terms

When thinking about your invoicing terms, remember always to be polite, keep the phrases short and precise, offer incentives for early payments, interest rates for late payments, and offer various payment process options.

Remember, when you have clear, specific, and consistent invoicing terms, you can increase the chances of getting your invoice paid on time. To have clients and customers pay on time is your goal in the first place and is always great for your cash flow.

John Rampton

John Rampton

John Rampton is an entrepreneur and connector. When he was 23 years old, while attending the University of Utah, he was hurt in a construction accident. His leg was snapped in half. He was told by 13 doctors he would never walk again. Over the next 12 months, he had several surgeries, stem cell injections and learned how to walk again. During this time, he studied and mastered how to make money work for you, not against you. He has since taught thousands through books, courses and written over 5000 articles online about finance, entrepreneurship and productivity. He has been recognized as the Top Online Influencers in the World by Entrepreneur Magazine and Finance Expert by Time. He is the Founder and CEO of Due.

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.
Categories

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More