4 Best Practices To Clearly Define Your Invoice Payment Terms

As a freelancer or small business owner, chances are you’ve experienced the frustration of late payments.

You’ve worked hard, formatted your hours into a clear, concise invoice and emailed on time, only for your remittance to be days, weeks, or even months late. It’s every entrepreneur’s nightmare!

Yet, some businesses are experts at getting the money they’re owed. Instead of waiting weeks or months, they get paid in days (or hours!). But how do they do it?

What are invoice payment terms? 

Most of those businesses have mastered their payment terms, which spell out exactly how you expect to be paid. 

This can include everything from accepted forms of payment and the currency you deal in, to invoice due dates. The latter is key: letting businesses know when you expect to be paid is the main way to avoid long spells with no incomings. 

To be fully transparent with a customer, business owners need to outline exactly how much time the recipient has to pay the invoice they’ve received. Typically that was 30 days, but times are changing. 

Now, with the rise of digital invoices and online payment options, there’s no reason why you shouldn’t be paid within a week or a few days. 

Payment terms explained

Usually, payment terms are listed at the top of an invoice alongside the invoice date, number and payment due date. Further terms and conditions, such as late penalties or early payment incentives, are typically listed at the bottom of the invoice.

Sounds simple, right? However, payment terms include some specialist terms which can throw early-days entrepreneurs off course. Ever came across a bunch of letters and had no idea what they mean?

These invoice payment terms are a great example of how complicated it can get:

  • Net monthly account = Payment due on last day of the month, following the one in which the invoice is dated
  • NET 7 = Payment seven days after the invoice date
  • 21 MFI    = 21st of the month following invoice date
  • 1% 10 NET 30 = 1% discount if payment received within ten days otherwise payment 30 days after the invoice date
  • COD = Cash on delivery
  • PIA = Payment in advance
  • EOM = End of month

While they may take a little time getting used to, using these terms is the best way to keep your invoices clear, concise, and consistent. 

But initialisms aren’t the only way to make sure you get paid on time. Read on for our best practices to define your payment terms effectively. 

Invoice payment terms: 4 best practice approaches

1. Know your industry standards

For some, getting paid ‘on time’ could mean instantly, while for others it may mean two months. That’s because payment terms differ with different industries. 

Net 30 is the standard invoice term amongst small businesses, which simply means the customer must pay you within 30 days of receiving the invoice. Others may be tempted to bill a client at Net 15, Net 7, or even COD in order to get paid faster, but this is risky.

If you get pushback from customers about your invoice terms, it’s probably because you’ve deviated too far from the industry’s status quo. If you’re asking for payment too quickly, this could rub customers up the wrong way. Equally, if your terms are too generous, it could put your business out of pocket. 

So before setting your terms, talk to industry peers and find out what’s customary in your field. 

2. Consider your cash flow

Getting paid and having a healthy cash flow is the lifeblood of every small business. But when waiting for customer payments, it’s easy to find yourself in a cash flow crunch. 

Picture this: you were supposed to be paid last Monday, but the money hasn’t come through and you’ve got a bill for a website designer to be paid on Wednesday. 

Not only does this pile on the stress, but it causes a huge financial burden for you and your business. 

In fact, a survey by Fundbox found that almost 80% of small business owners cut their own compensation when customers are slow to pay their bills, while 23% avoid hiring new employees and 20% cut their marketing and growth efforts.

That’s why it's imperative to know exactly what payments you have coming out when, and to set your payment due dates in accordance. This will avoid having to borrow money to cover impending bills and promote a healthy cash flow, providing your customers hold up their end of the bargain.

3. Don’t be shy with penalizing

Though it may seem uncomfortable at first, being ruthless with your terms is often the most effective way to ensure you get paid on time. 

Late fees are a common way of securing on-time payments, without jeopardizing your client relationships. You give the client a little nudge to pay you now, or they incur more costs further along the line.

Some industries may consider a fixed amount to be standard, like a $40 fee for every 10-days past due, while others might have a standard percentage, such as 10% for every 15-days past due. 

However, the best way to help determine the fees or penalties is to consider the true cost of late payments to the business. For instance, if a late payment means you can’t pay your rent on time, and your landlord charges a $100 late penalty, it will make sense to charge a $100 late payment fee to cover that cost. 

If customers continue to pay your invoices late, simply stop working with them. The secret to running a good business lies in knowing your worth.

4. Go digital 

When you’re a busy freelancer or business owner, it can be easy to let standards slip when it comes to things like invoicing — especially at the end of the month, when time is of the essence. 

So to guarantee you always send out professional-looking invoices — featuring clear, concise and detailed payment terms — it’s time to go digital.

Perfect Invoice allows you to email invoices directly to your customers, giving them the option to pay online or via a more traditional route using an attached pdf.

Not only does this speed up the payment process, but with your standard payment terms pre-saved into every invoice template you’ll never forget to set your expectations again.

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