Your business depends on customers making payments for the products and services they receive. Setting clear payment terms and processes helps businesses get paid on time consistently and avoid cash flow issues before they’re a problem.
Sending invoices and collecting payments might seem straightforward, but most businesses will deal with late or missed payments at some point. When missed payments pile up, it can lead to major problems for your business and its future. In this article, we’ll answer payment questions like:
- What payment terms should you include on your invoices?
- How do payment terms impact your company and your customer experience?
- What can you do to make collecting payments easier?
Learn how to set more effective payment terms for your business and more below.
Table of contents
- What are invoice payment terms?
- Why every business needs payment terms
- Benefits of payment terms
- What should your payment terms include?
- How to set payment terms to get paid
- Payment terms glossary
What are invoice payment terms?
Invoice payment terms are the rules you set for how and when your customers pay for your products and services. Most payment terms set a specific due date for when customers or clients must pay an invoice. They also include clear instructions for how to pay and the consequences of what happens when someone doesn’t pay after a set number of days.
Businesses with clear invoicing processes, including payment terms, have fewer late payments and better cash flow management.
Why every business needs payment terms
No matter what type of business you run or whether you sell products or services, you need clear payment terms. Without them, your business is at high risk of losing money on missed or late payments.
Even with clear payment terms, many customers pay late. Here are some shocking statistics:
- A recent study found that large businesses in Australia pay about 53% of small-to-medium (SMB) invoices late.
- About 82% of failed small businesses cite cash flow issues as the primary reason they closed their doors.
- Late payments cost Australian businesses about $1.1 billion each year.
- Recent findings suggest businesses waited a full week longer (from 31 to 38 days) to pay invoices in July of 2022 than in January of that same year. Growing payment delays could continue with tougher economic conditions.
Late payments ultimately cost businesses in the long run. After all, cash flow issues mean you can’t grow as quickly, generate as much revenue, or at worst, keep the lights on.
For these reasons, it’s also helpful to work with an accounts receivable service like Visory. Chasing down unpaid invoices is one of the least favorite parts of running a business. By outsourcing your accounts receivable, you won’t have to. Visory can also help you set better payment terms and processes to prevent more unpaid invoices from happening.
Benefits of payment terms
Beyond avoiding late or missed payments, there are many benefits of having clear payment terms. When invoices are paid on time, it helps your business show:
- Better cash flow for growth: On-time payments give you a clear picture of how much money you have to invest back into your business.
- How well you manage your business: Consistent payments are a key performance indicator (KPI) of how well you manage your company finances.
- Creditworthiness: You’ll know what you need from suppliers and how much cash you have on hand, which can help you get loans or other funding.
What should your invoice payment terms include?
Your business is unique, so your invoice probably looks a little different from other companies. However, invoice payment terms have consistent elements no matter the business.
Invoices usually include basic company information like:
- Invoice number to track each invoice
- Business name, registration details and address
- The date you issued the invoice
- Invoice total
When it comes to getting payments, these elements are the most important:
- Payment due date – How much time someone has to pay is usually 30 days, but with electronic invoicing, payment turnaround can be as soon as seven days after the invoice.
- Late payment penalties – Many businesses will charge a percentage of the invoice as a late fee for each day the recipient is late on payments.
- A list of payment methods you accept – ACH bank transfers, wire transfers, credit cards, cash, or other methods
How to set payment terms to get paid
On-time payments directly impact your bottom line. Clear payment terms avoid confusion and make it easier for customers to pay you.
Follow the steps below to set better payment terms to get paid consistently and faster.
1. Send contracts
Setting clear payment terms starts before the invoicing process, and before you even start working with a client.
It starts with a contract, a legal agreement that you and your customers sign that details:
- How you’ll work together
- Services you’ll provide
- When you’ll start and end work
- How you’ll be paid
A contract sets expectations on both sides before you provide products or services. If someone breaks the contract, there’s a signed agreement that you can refer back to.
When you build your contract, make sure it includes:
- Involved parties: List your company, your customer, and any other involved party.
- Contract term: Outline how long the contract will be active. For example, if you provide six months of service, your contract will have a six-month term.
- Payment details: Describe when your clients will pay you, how they’ll make payments, and late or missed payment penalties.
- Duties and responsibilities: Outline your duties and responsibilities to your customer.
- All other agreement terms: Every business, product, and service is different. Your contract may require specific terms that are unique to the way you do business. Tailor the contract to your company.
2. Invoice promptly
You may be tempted to put off sending an invoice by a couple of days. Maybe it’s not due for a few weeks or you’re just busy. This is a big mistake.
Sending your invoice immediately after doing work will help you get paid for a few reasons, including:
- It’s top of mind: Your company’s name is fresh in your customer’s mind when they receive it. There’s no chance they’ll think it’s spam or an invoice that was sent in error, increasing your chances of being paid on time.
- You can get faster payment: The earlier you send your invoice, the earlier your clients are able to budget, move money around, or otherwise prepare to pay your invoice.
- It shows you’re professional: Sending documents promptly shows your customers that you run a tight ship.
3. Collect deposits or upfront payments
No matter what payment terms or process you set, always prepare for some customers to make late payments. Overall, it shouldn’t happen often or be a big percentage of your business, but preparing ahead will keep your company healthy.
However, there are some tactics you can use to prevent missed payments from happening to start, including:
- Asking for payment in full upfront: Explain to your clients that you require upfront payment for services before they begin. For example, many software companies offer annual pricing to get upfront payment.
- Collecting 50% upfront: Request half of the total value of the job upfront. Your customer pays the rest when the job is complete.
- Setting up payment milestones: For larger and high-cost projects, break up deliverables over time. For each deliverable, set a payment milestone that they’ll need to pay before you continue work.
- Getting a material deposit: At the very least, make sure that you’ve covered the cost of materials you use for a job. The best way to do so is to collect a material deposit. Simply work out the total cost of materials for the service and require that as the minimum deposit to get started.
4. Track payments and set automatic reminders
You can’t collect late or missing payments if you don’t know which clients are behind. Luckily, you can track payments and set automatic reminders to lessen the burden of managing your accounts receivable.
Accounting and invoicing software makes it easier to send and track invoices, and you can also receive alerts when customers are past their due dates. Customers can be forgetful. Reminders can help your customers keep up with their end of your agreements.
5. Work with a bookkeeper or accounts receivable expert
How you handle invoices and payments can influence the failure or success of your business. However, many businesses don’t have the time or interest to manage it in-house.
If that’s the case, consider working with Visory, an online bookkeeping service with accounts receivable experts. To get started, set up a time to chat with a Visory expert, who will get to know your business and invoicing needs.
Payment terms glossary
While preparing invoices and using accounting software, you may come across these payment terms.
|What it is
|A monthly credit to show payment for a full month’s supply
|You receive cash before shipping orders
|CIA or PIA
|You receive payment in advance
|Net 7, 10, 15, 30, 60, or 90 – Net before a number stands for the number of days you have to pay. For example, you need to pay a Net 15 invoice 15 days after its issue date.