Choosing the wrong invoice terms can disrupt your small business’ cash flow and alienate customers. However, for a freelancer or an entrepreneur just starting out, it can be difficult to know what terms to set to get paid faster and establish positive relationships with your customers. In this article, we’ll help you determine what terms to provide to your customers.
Find Out Your Industry Norms for Invoice Terms
The first cardinal rule of invoicing is to try to get paid as soon as you can. NET 30 is the standard invoice term among small businesses, and you’ve probably heard other business owners mention it. It simply means that the customer must pay you within 30 days of receiving the invoice. But why choose NET 30 if you can get away with billing a client at NET 15, NET 7, or even cash on delivery (COD)?.
If you get pushback from customers about your invoice terms, the reason is probably because you’ve deviated too far from what’s customary in your industry. Before setting your invoice terms, you’ll need to talk to industry peers and find out the norms in your industry.
Three Types of Small Businesses
To get further insight into this, we spoke with Edward Castaño, Vice President of Marketing for invoice financing company BlueVine. He explained that invoice terms vary significantly across industries, but that small businesses generally fall into three categories in terms of invoicing standards:
- In some industries, virtually all businesses offer the same terms. For example, almost all manufacturers of tangible consumer goods offer NET 30 terms.
- In some industries, there is a pretty narrow range of terms that are offered. For example, in the fashion and construction industries, NET 30 and NET 60 are most common.
- Finally, in some industries, invoice terms are all over the map. Freelancers are a good example of this–some require up front payment, and some don’t mind payment in 60 days or more. Fore more information on freelancers I wrote another article which you can find here.
Businesses in the first bucket don’t have much choice but to follow the industry standard. Businesses that fall into the second and third buckets have some flexibility in choosing their billing terms. In the next section, we’ll discuss what such businesses should keep in mind when setting their invoice terms.
Things To Keep In Mind When Choosing Your Invoice Payment Terms
There isn’t a “one-size-fits-all” approach to choosing your invoice payment terms. What works for one customer may not work for another. You can choose the terms that are best for your business based on the following tips:
Actions speak louder than words when it comes to paying your bills. You can find out how a client has paid bills in the past by pulling their business credit report. If the report shows that they’ve been tardy with other suppliers, you may want to require upfront payment on the invoice or set a short deadline for payment.
Even if a prospective client has a good credit score, working with a new client always has some level of uncertainty. You can test the waters with a new client by asking for milestone payments at different phases of a project or by asking for an upfront deposit.
If you’ve done business with the client before, you can base your terms on your experience with the client. If things have been going well with a NET 30 system, it may be a good idea to keep things as they are.
Size of the Invoice
The smaller an invoice is, the less time you want to spend in chasing payment on it. If an invoice is just for a couple hundred bucks, requiring immediate payment or a NET 10 deadline may be most suitable. Larger invoices may merit a longer deadline because the client needs time to come up with the cash.
If you’re doing a large project with a new client, consider asking for an upfront deposit to reduce the risk of nonpayment. This is what Michelle Messenger Garrett, owner of Garrett Public Relations, does now. “I generally use ‘Net 30’ and that’s always worked fairly well for me,” Garrett says. “However, some clients are late payers, so one thing I’ve begun doing more recently, especially for larger projects, is billing for part of the fee up front. That way, you establish right away your expectations of being paid in a timely fashion.”
Late Fees and Interest
Lastly, consider adding late fees or interest charges to your invoice terms to enforce your payment expectation. It’s customary to charge 1.5-2 % of the invoice amount as a late fee for past due invoices. Doing so adds some sense of urgency to the payment and shows the client that are you serious about collecting payment by the deadline. Then, make sure you follow up. If the client hasn’t paid on time, send them a second invoice detailing the reason for the late charges. In extreme cases (e.g. several months or a year has gone by with no payment on a large invoice), you can hire an attorney or file a complaint in small claims court.
How to Bring In Money Sooner
In order to retain business, you sometimes have to give longer payment terms to a customer than you would like. There are two tools at your disposal for bringing in money sooner and firming up your business’ cash flow: early payment discounts and invoice factoring.
Early Payment Discounts
Early payment discounts, just like they sound, offer an incentive to customers to pay you before the invoice due date. Most NET 30 and longer invoices are coupled with early payment discounts. For example, if a customer pays you within 10 days on a 30 day invoice, you might give them a 2 % discount. On the invoice, this would be noted as 2%/10 – NET 30.
Early payment discounts are a win-win. They help you get paid sooner so that you can reduce gaps in your cash flow and meet your own financial obligations. They also keep the customer satisfied by saving them money.
Invoice Factoring and AR Financing
Traditional invoice factoring involves selling (or assigning) your customer invoices to the invoice factoring company. It’s a financing option reserved for businesses that will be using $10K per month in financing or more. But nowadays, there are also invoice financing companies. They will not contact your clients, and your clients can continue to make checks or electronic payments under your business’ name.
BlueVine lends up to $250,000 in as little as 1 business day. They will give you an 85 % advance upfront, which you can use to pay bills, meet operating expenses, etc. BlueVine will give you the remainder (minus fees) once your client pays the invoice. Fees start at 0.5 % per week.
Why Invoice Terms Matter
There’s a lot at stake when choosing your invoice payment terms. They set the tone for your future relationship with customers and affect your business financially.
The financial impact can be bigger than you think. For example, when a customer pays 30 days late, you may end up having to borrow money through a factoring company to cover your own obligations. The cost of doing that on a monthly basis is about 4 %. So, if a customer pays a $10,000 invoice 30 days late, it’s like losing $400.
Invoice payment terms also impact your customer relationships. If you bill a client too early, and the client will be annoyed. Give them all the time they need, and you may never see a cent that’s owed to you. If you invoice clients at different phases of work, then your client’s failure to pay at one stage can also slow down the project or even bring it to a halt. You need to strike a careful balance when choosing your invoice terms.
Choosing your invoice terms doesn’t have to be rocket science. Following the tips above will help put you on the right path. If customers are still taking longer to pay you then you’d like, consider making early payment discounts or invoice factoring part of your invoicing solution to firm up your business’ cash flow. Good luck!