Choosing the wrong invoice terms can disrupt your cash flow and alienate customers. However, for 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. Your industry and client history are key components in choosing the right invoice terms.
Before we dive into the details on this topic, we suggest you check out FreshBooks. This is because with FreshBooks invoice software you can easily set up payment terms. Based on the terms you setup, FreshBooks reminds you when an invoice is coming due so that you can stay on top of your accounts receivable. Plans start at just $15 per month and you can get started for free.
Typical Invoice Terms by Industry
The 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. It simply means that the customer must pay you within 30 days of receiving the invoice. Small business owners might be tempted to bill a client at Net 15, Net 7, or even c.o.d. in order to get paid faster, but this is risky.
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.
Payment Terms Examples: Three Types of Small Businesses
Depending on what industry your business is in, payment terms might be consistent across the board or vary depending on the size and length of the job. If your business falls into an industry where Net 30 is standard across the board, you don’t have as much flexibility as someone who is a freelancer.
Small businesses generally fall into three groups: First, a business may offer the same payment terms as businesses in similar industries; second, businesses may offer a narrow range of terms; third, payment may vary widely for businesses in the same industry. To get further insight, 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.
The three categories small businesses fall into when it comes to setting payment terms are:
- Terms are always Net 30: For example, almost all manufacturers of tangible consumer goods offer NET 30 terms.
- Terms range from Net 30 to Net 60: For example, in the fashion and construction industries, NET 30 and NET 60 are most common.
- Terms vary widely: Freelancers are a good example of this ― some require up-front payment, and some don’t mind payment in 60 days or more. For more information on freelancers check out the freelancer’s guide to invoicing.
To ensure that your invoices are paid on time, you need to do your research to determine the best invoice terms to offer your customers. Setting the right payment terms early on ensures that you are paid faster which can help you maintain a positive cash flow.
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. If a client has a good payment history, you may not need to ask for a deposit upfront whereas you would for a brand-new client. For high dollar jobs, consider billing in installments.
Tips we recommend to help you choose invoice terms that are best for your business are:
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 payments at different phases of a project once a milestone has been reached or by asking for a deposit upfront.
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. This is because there is no need to change something that is working. The overall goal with selecting the best invoice terms is so you can get paid faster.
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 of 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 upfront. That way, you establish right away your expectations of being paid in a timely fashion.”
Late Fees & 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% to 2% of the invoice amount as a late fee for past due invoices. The key is to review your Accounts Receivable Aging report weekly and follow up on delinquent invoices by sending a friendly payment reminder email to customers.
If you are unable to reach your customer, you may need to take the next step and send a collection letter to show the client that you are serious about getting paid. In our collection letter guide, we provide you with a template and give you some tips on how to get paid faster and avoid sending a client to a collection agency.
If you’re in the market for a great accounting software for freelancers, FreshBooks makes it easy to charge late fees or interest on delinquent customer invoices. Plus with FreshBooks, you can easily accept payments by credit card or bank transfer. Take FreshBooks for a test drive with a free 30-day trial.
How to Use Invoice Terms 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. If you want to encourage some customers to pay quickly, you can offer early payment discounts. If other customers want more time to pay, you can continue to offer Net 30 terms and use invoice factoring to bridge the funding gap.
Early Payment Discounts
Early payment discounts 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.
QuickBooks makes it easy to offer early payment discounts to customers. When you create customers in QuickBooks, you can select the payment terms for all invoices. Assigning payment terms will allow QuickBooks to send you an alert when invoices are coming due. You can send a reminder email to customers to ensure invoices are paid on time.
Below, you will find a snapshot of an invoice that was created in QuickBooks with early payment terms:
Early payment discounts are a win-win. They help you get paid sooner so 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 & 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 $10,000 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’s name.
BlueVine lends up to $5 million in as little as one business day. With BlueVine you can receive an 85% – 90% advance on your invoices upfront, which you can use to pay bills, meet operating expenses, and so on. BlueVine will give you the remainder (minus fees) once your client pays the invoice. Fees start at 0.25% per week. BlueVine also offers small business lines of credit up to $250,000. Get pre-qualified online in minutes.
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. As discussed, you need to weigh the standard in your industry, the client’s payment history and the potential revenue the job will bring in when deciding what invoice terms to offer.
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% or more on average. 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, the client will be annoyed. On the other hand, 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.
Frequently Asked Questions (FAQs) About Invoice Terms
We have included the most frequently asked questions about invoice terms in this section. If you don’t see your question, please head over to our Fit Small Business Forum and post your question there. We answer hundreds of questions from small business owners like you every day!
The most frequently asked questions about invoice terms are:
What are the terms of payment?
Terms of payment is the length of time given to a buyer to pay off the amount due. It could be an upfront deposit, c.o.d., or a deferred payment of 30 days or more. Common invoice terms are Net 30 which means payment is due within 30 days of the invoice date.
When should an invoice be due?
The time between when goods and services are provided to customers and when an invoice is due should generally be 30 days. However, it can vary based on several factors. Certain industries have standard terms used by most businesses in that industry. A customer’s payment history and the invoice amount should also be considered.
What are the most common invoice terms?
If you invoice your customers, there are some invoice terms and definitions with which you should be familiar. These include common payment terms, payment types, and invoice funding options you can use.
The 10 most common invoice terms and their definitions are:
- Terms of sale: Payment terms the buyer and seller have agreed to for the purchase and sale of products and services. This includes the purchase price, delivery charges, and shipping charges. It also specifies the due date.
- Payment in advance: Deposit or payment made by a customer before starting work 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.
- Immediate payment (aka, c.o.d.): Immediate Payment means that Payment is due at the same time a product or service has been provided or delivered.
- Net 7, 10, 30, 60, 90: Payment is due within 7, 10, 30, 60 or 90 days after the invoice date.
- 2/10 Net 30: 2/10, net 30 invoice payment terms include a 2% discount if the invoice is paid within 10 days of the invoice date; otherwise the invoice is due in full 30 days after the invoice date. For example, an invoice for $1,000 could be settled for $980 if it is 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 (e.g., monthly or quarterly).
- Quotes & estimates: Quotes and estimates are essentially a proposal for a prospective that includes a list of the products and services, the estimated cost and other pertinent details. In general, you create quotes and estimates for new or existing customers to get their approval before you begin work on a job or project.
- Recurring invoice: Recurring invoices are scheduled payments made to a debit or credit card you have on file for a customer. Recurring payments are generally used for repeat services such as monthly pool service or monthly bookkeeping services.
- Interest invoice: If a customer fails to pay their invoices on time, you can charge interest on the total amount due on each invoice. The calculation would be based on the number of days the invoice is past due.
- Invoice factoring: Invoice factoring is selling or assigning your customer invoices to a factoring company. They will pay you on average between 80-90% and then once they collect payment from you customers they will provide you with the remaining balance after fees.
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.
To make this process easier, consider using an accounting software like FreshBooks. With FreshBooks you can easily set up default payment terms for all customers as well as custom payment terms for one customer. Start a 30-day trial.