This article is part of a larger series on Bookkeeping.
Most companies will set payment terms to ensure that they’re paid on time, the most popular terms being 30 days (or Net 30). It’s important part of accounts receivable management and an important bookkeeping task to make these terms transparent to customers, and they should be displayed on every invoice that’s issued.
QuickBooks Online allows you to set a global default invoice term that will automatically appear on all customer invoices. You can also specify different invoice terms for particular customers.
What Are Invoice Payment Terms?
Invoice payment terms are the conditions that outline how, when, and by what method your customers or clients will provide payment to your business. They are an agreement that sets your expectations for payment, including when your client needs to pay you and the penalties for missing a payment.
Invoice payment terms allow you to make accurate cash flow projections, which in turn help you plan for taxes and manage the growth of your business. Payment terms are essential when negotiating a contract, and they should maximize how quickly your clients pay you while minimizing inconvenience for your customer.
The Five Most Common Invoice Payment Terms
- Payment in advance: Deposit or payment made by a customer before work starts on a project. For example, a customer might make a 50% deposit to start work on the project with the balance due upon the completion of the project.
- Due upon receipt: A payment due upon receipt is a payment that customers must make immediately upon receiving the invoice for a transaction. Typically, businesses use payment due upon receipt to signify that payment is due by the following business day.
- Net 7, 10, 30, 60, 90: These terms refer to the number of days in which a payment is due. For example, Net 30 means that a buyer must settle their account within 30 days of the date listed on the invoice.
- 2% 10 Net 30: Customers will receive a two percent discount if the invoice is paid within 10 days, otherwise the full amount is due in 30 days. For example, an invoice for $1,000 could be settled for $980 if it’s paid within 10 days.
- Line of credit pay: Most common among larger corporations, line of credit pay gives the customer the ability to pay their invoices over a period of time, such as monthly or quarterly.
Choose the Best Invoice Terms for Your Business
Choosing the best payment terms for your business is essential, as it helps to regulate your cash flow and also impacts your customers’ payment habits. Below are a few things to consider before setting your terms:
Cash Flow Considerations
Although you have to keep customer expectations in mind when setting invoice payment terms for your business, your primary consideration should be your company’s cash flow needs. The best invoice payment terms are the ones that provide enough cash to keep your business running while carefully considering your clients’ needs.
While using the “Due Upon Receipt” payment terms on your invoice can provide a quicker payment turnaround and more reliable cash flow, it can also be inconvenient for your clients. It could also potentially be off-putting to them and make you seem difficult to work with, resulting in even slower payment or a decreased likelihood of repeat business.
You’ll also want to consider industry standards when setting your invoice payment terms. While the most common term is Net 30, it’s also important to know the standard for your industry. For example, the most common payment term in the construction industry is Net 90, but in the landscaping industry, it’s Net 7. Making sure that your invoice payment terms align with industry expectations is a crucial way to ensure that you’re paid on time while keeping your customer happy.
If you have done business with the client before, you can base the invoice payment terms on your experience with them. Do they pay on time, or do they still owe on a previous invoice? Depending on the experience, you may want to set a shorter deadline for payment. However, if things are going well with the current terms―Net 30, for example―you may want to keep things as they are.
Working with a new client always has some level of uncertainty. You may want to consider asking for payments at different phases of a project once a milestone has been reached or asking for a deposit upfront. This will help to demonstrate to your customer that prompt payment is important to your business.
Size of the Invoice
Always consider the invoice amount when determining the payment terms. The smaller an invoice is, the less time you want to spend chasing payment on it. If an invoice is for a small amount, requiring immediate payment or a Net 10 deadline may be most suitable. Larger invoices may merit a longer deadline so that your client has more time to come up with the funds. If you’re working on a large project with a new client, consider asking for an upfront deposit to reduce the risk of nonpayment.
Early Payment Discounts
Early payment discounts offer an incentive to customers to pay you before the invoice due date, ultimately saving them money. These discounts help you get paid sooner so you can meet your own financial obligations. Most invoices with Net 30 and longer terms 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.
We selected QuickBooks Online as the overall best small business accounting software, partly because it makes it easy to offer early payment discounts to customers. When you add a new customer, you can select the payment terms for all of their invoices. Assigning payment terms will allow QuickBooks Online to send you an alert when invoices are coming due. If desired, you can send customers a reminder email to ensure invoices are paid on time.
Here’s a snapshot of an invoice that was created in QuickBooks with early payment terms:
Late Fees and Interest
Consider adding late fees or interest charges to your invoice terms to enforce your payment expectation but be sure to indicate this clearly on the invoice. It’s customary to charge 1.5% to 2% of the invoice amount as a late fee for past-due invoices. You can follow up on delinquent invoices by sending a friendly payment reminder email to customers.
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. You need to weigh the client’s payment history and the potential revenue the job will bring in when deciding what invoice terms to offer.