Key Takeaways
- We believe the most important terms to know are: Terms of Sales, Net 7,10,30,60,90, Interest Invoice, and Quotes & estimates
- Having a deeper understanding of invoicing terms helps people better understand cash flow and financial processes for freelancers or companies.
- The success of businesses may depend on invoice payment terms
- 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
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
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
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.
