Defining invoice payment terms is essential for any business who wants to be paid on time. If you’ve sent a few invoices before, you know that being paid promptly is by no means a given, but well-written invoice payment terms are one way to ease the process on both ends of the transaction.
Invoice payment terms meaning
Invoice payment terms outline the process, timeline and conditions surrounding a pending payment. It’s important to have these terms set in stone to ensure the most seamless, quickest payments between businesses.
Your invoice payment terms will describe the types of payment you accept (i.e., Direct Debit, bank transfer, cheque, etc.) and the currency you wish to be paid in. Additionally, you’ll want to include the expected due date for the payment to occur, as well as any potential late-payment penalties you may have in place.
Defining invoice payment dates
Traditionally, invoice payment terms were quite long – sometimes extending beyond a month – but as electronic payments have developed, it’s no longer necessary to employ longer invoice periods. Without the need for in-person banking or long transfer processes, an online payment can be made in a matter of seconds, so these days you’re better off requesting shorter invoice payment terms, simply to ensure you get paid sooner.
According to Xero, nearly half of all invoices are paid late. If you set your payment term to just one week, you can expect a couple payments to come in late, but they’ll still come sooner than if you set your payment term for one month or longer. Xero’s invoice data shows that on average, invoices with a one-week due date tend to be paid around day 15, compared to one-month due dates which are paid around day 33 on average.
Currently, 75% of companies request payment within two weeks, so the tide is already turning towards quicker terms.
Of course, if you set a shorter term, you might be met with some pushback, particularly if shorter terms aren’t common practice in your industry, i.e., you’re operating in a more traditional sector, like manufacturing. If you’d rather avoid potential negotiations, it might be best to meet in the middle with your invoice payment terms; 14 days is a good amount to ensure they won’t feel rushed, but you won’t be kept waiting.
Furthermore, larger bills might require more time, so be cautious of what it is you’re invoicing, and take some time to understand what’s standard for your industry. If it’s a few hundred pounds, there’s no reason it should take more than a week for payment to come through, but if you’re dealing with larger invoices, you might want to allow a bit of grace for your client to arrange the funds.
There won’t be one best practice for all of your invoices; you should evaluate your invoice payment terms for each specific invoice you’re sending out. Consider your clients’ history and check their business credit reports to see how quickly they typically make payments.
There might be regional differences to consider, too. For instance, in terms of duration for invoice payment terms, UK businesses tend to be a bit longer, while Scandinavian businesses typically offer shorter payment periods.
If you’re working with a new client, you might consider asking for a deposit to be paid ahead of time so you can get an idea of their process and timing.
When working with a client you already have a strong relationship with, don’t rush to shrink your payment terms unless tardiness is a legitimate issue. If things are working fine the way they are, don’t risk throwing things out of loop by forcing faster payments.
Late payment fees and early payment discounts
Both overdue payment penalties and early payment discounts are great ways of ensuring you get paid on time. The standard penalty is 1.5-2% of the invoice amount for late payments.
With or without late fees in place, it’s important to follow up with your clients with regular reminders about delayed outstanding payments.
Early payment discounts add an extra incentive to complete the process quickly. Typically, a 1-2% discount will be offered for payments within a certain number of days – such as within the first 10 days of a 30-day invoice term.
Writing invoice payment terms
In terms of the language and tone of your invoice payment terms, aim to be polite without being informal. Not only will politeness reinforce or help build a stronger relationship with your partners, you’re also more likely to get paid on time if you approach the invoicing process in a friendly, positive manner.
Itemise your payment terms, outlining each specific good or service, the price per unit, total costs and tax amounts clearly, so that there’s no space for misinterpretation. An overly convoluted invoice may delay the process, so be clear and concise while still ensuring all necessary information is available.
Ensure you understand the requirements of the client ahead of time, such as whether they need a Purchase Order (PO) number in order to process payment, so that there’s no back-and-forth once the invoice has been sent.
There are many standard business terms you might see in invoice payment terms, like “Net 30” to describe a 30-day payment term, “CIA” to describe a cash in advance deposit, “20 MFI” meaning payment must happen by the 20th of the month following invoice date, or “1% 10 Net 30”, which describes a 1% discount offer on payments made within the first ten days of a month-long term.
Get to know the jargon, but be sure that your client is familiar with it too if you’re going to use it in your payment terms. This will depend on the nature of the client’s business and how they generally communicate or conduct business – if you feel these terms might be a bit complicated and delay the process, avoid them.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.