10 Important Payment Terms Small Business Owners Should Know

0

Image source: Getty Images

One of the most important parts of an invoice is the terms of payment included in it. Learn more about payment terms and how to use them to get paid on time.

Payment terms may seem like a minor addition to an invoice, but they can have a major impact on how quickly you get paid.

There’s a ton of accounting software and invoicing software on the market today that makes it easy to produce a professional invoice, but if you don’t add the proper due date, you may end up waiting for payment. for a long time.

Presentation: what are the terms of payment?

Part of writing an invoice correctly is including the appropriate payment terms on the invoice. Payment terms specify the exact terms of the sales contract, including when the customer must pay.

For example, if your invoice includes Net 30 terms, that means your customer must pay the invoice within 30 days.

Adding payment terms to an invoice also helps with budgeting. For example, if you offer your customers Net 30 payment terms, you can assume that you will receive payment within that timeframe, allowing you to manage cash flow properly.

Of course, it’s unlikely that every customer will pay on time, but if you screen customers properly, there’s a good chance that late payments will be at a minimum.

So what payment terms should you offer your customers? Part of the answer lies in the type of business you own. Service companies tend to offer shorter terms or require a down payment, while retail providers and large equipment sellers may give their customers a longer payment term.

As a small business owner, it’s up to you what terms you offer your customers. But before invoicing, it may be a good idea to familiarize yourself with these invoicing and payment terms.

10 billing and payment terms you need to know as a small business owner

Everyone wants to be paid for the work they do or the products they sell. But what if you’re still not sure what payment terms to give your customers?

You can base your decision on their credit history, while you can choose to ask new customers to pay a deposit. For some customers, you may offer no credit.

If you are unsure of what payment terms or which ones to use, these terms may be helpful.

1. Payment in advance

Common in professional services companies, payment in advance lets your client know that the entire invoice for the goods or services is due before you start work. Advance payment is common in the legal profession and in home improvement and landscaping businesses.

2. Net 7, Net 15, Net 30, Net 45, Net 60

Using payment terms on your invoices is nothing new. Most companies that offer payment terms to their customers offer Net 10, Net 30, Net 60 or a similar variation. This means that the invoice is due within this period.

For example, if you offer Net 10 payment terms to creditworthy customers and the invoice is dated August 15, they are expected to make payment by August 24. If you offered Net 30 payment terms, your customer would need to pay their bill by September 13.

Terms can still be extended to customers without using Net 10 etc. by simply indicating the due date on the invoice. This process is much more common today than it was in years past, for good reason. It leaves no room for confusion and lets your customer know exactly when their payment is due.

Sample invoice from FreshBooks.

FreshBooks lets you create an invoice that includes a specific due date and links to online payment options. Image source: author

3. 2/10 Net 30

2/10 Net 30 means that if your customer pays you within 30 days, they are entitled to a 2% discount. For example, if your invoice was $100 and you offered 2/10 Net 30, if your customer paid within 10 days, they would pay you $98 instead.

Of course, as a business owner, you are free to offer whatever discount you want. Early payment discounts work best on larger invoices because they can help you pay larger invoices faster, while giving your customer more incentive to pay sooner.

4. Payment at time of service

Pay-as-you-go is an easy-to-understand concept. When eating out, payment for the food you ordered is due at the time of service. Doctors and dentists usually require payment at the time of service, just as you would if you were selling your wares at a flea market or craft show.

5. Due upon receipt

Due when received indicates that you expect your customer to pay you once they receive the invoice. Historically, this meant that your customer would pay you on their next check cycle. However, with the online payment capability, your customer can now actually pay you upon receipt.

If you use this payment term, be sure to offer your customers a quick way to pay the invoice, such as a link to an online payment option. Cash on receipt is best used for businesses that email invoices to their customers.

6. Deposit required

Similar to the 50% deposit, the required deposit means that to complete the purchase, you need a deposit from your customer. This is common for custom orders created specifically for the customer.

7. Recurring

Recurring invoices are used to bill customers for regular monthly services, such as office cleaning, landscaping, web services, or consulting fees.

The invoice is usually the same amount for the duration of the agreement, so if your client signed a contract for a year, you would send them a monthly recurring invoice for the amount you agreed.

8. 50% deposit required

Not used in all businesses, a 50% deposit is quite common in professional services industries such as those offered by lawyers and accountants. A 50% down payment is also common in the construction and home improvement industries, where the work can take months.

9. Cash on Delivery (COD)

Cash-on-delivery or cash-back terms require your customer to pay for the goods on delivery. Very popular at one time, the online payment option has reduced the use of COD to a fraction of what it once was, but it is still used by some businesses.

Illustration of a man carrying a box and a woman holding dollar bills.

Cash on delivery or COD allows your customers to pay upon delivery of the product. Image source: author

10. Factoring of invoices

Invoice factoring isn’t always the best solution for collecting invoices, but for small businesses with limited cash flow options, it can quickly pour money into your bank account.

If you use invoice factoring, you sell an unpaid invoice to a factoring company, who will pay you a set percentage of the invoice value. The collection activity then passes to the factoring company, which retains its share, while sending you the balance once it has received an invoice payment from your customer.

Factoring fees vary widely and can vary between 65% and 90%, so if this is something you decide to use, do your homework before signing an agreement with a factoring company.

Some Suggestions for Using Payment Terms

When offering payment terms to your customers, it is worth paying close attention to the following suggestions.

  • Filter your customers: Before offering payment terms to any of your customers, do your due diligence to determine if they represent a good credit risk. This should be done with every customer who wishes to buy on credit. If you spend a few extra minutes doing your research, you will hopefully avoid tedious collection activities later on.
  • Be clear about due dates: It’s your prerogative to use Net 30 or similar terms when billing your clients, but you’re more likely to get paid faster if you’re very specific about the due date. For example, instead of using “Net 30”, just say Payment Due September 15th. It’s hard to miss.
  • Offer your customers several payment methods: Perhaps the most important thing you can do on your end to facilitate faster payments is to give your customers multiple ways to pay you. Offering online payment options, in particular, is likely to get you paid faster than requiring your customers to write you a check and mail it.
  • Use late fees if necessary: The best way to let your customers know you’re serious about getting paid on time is to assess late fees when payment is overdue. Be sure to note on your initial invoice that late payments will incur charges, so your customers know this in advance. I hope you never have to use them.

Offering credit to your customers can be a daunting step, especially for small businesses with limited cash flow. But if you do it the right way, offering credit expands your customer base, increases your cash flow, and helps your business grow.

Share.

About Author

Comments are closed.