Last editedNov 20228 min read
Advantages, disadvantages and use cases of invoice billing.
Invoicing as a billing method can offer advantages and disadvantages to businesses; however, the crucial point for businesses is how invoice payments are collected. The payment method that a company accepts on their invoices will determine whether invoicing is beneficial or a bottleneck to business growth.
This article will review the broad advantages and disadvantages of invoicing as a payment collection method and then discuss why the real advantage and disadvantage of invoicing is in how you actually collect the payment.
In this article:
What are the advantages of using invoices?
You have a right to be paid for your efforts, and you can set your own payment terms.
These should be made clear at the start of a trading relationship, but it is the invoice that formalises your demand for payment. The use of an invoice has several advantages.
It prompts payment. Where upfront payment is not required, the chances are that a customer won’t pay you without receiving an invoice first. It’s rare to be paid for goods or services provided before an invoice has been issued, with debts rarely settled voluntarily and without a prompt.
Invoices remind clients of the work completed or goods provided. It’s an itemised bill, so customers can see what they’re getting for their money.
They’re a useful record-keeping tool. HMRC requires businesses to retain records for up to six years and the self-employed to keep evidence of sales, income, and expenses for five years. Not having up-to-date and accurate archives of invoices issued and received can risk a hefty fine from the Revenue.
It’s an opportunity to send a positive message about your company and brand. This applies to the document itself – how polished it looks, with a company logo, website address, and use of professional language – and the invoicing process. Efficient invoice generation and payment collection can improve customer satisfaction. Equally, poorly managed systems can easily damage a company’s reputation.
What are the disadvantages of invoices?
There are some potential downsides to using invoices, but these are mostly caused by poor management and inadequate processes:
A badly drafted, vaguely worded document can be wrongly interpreted or easily disputed, delaying payment.
If product sales or the hours of work undertaken are not meticulously noted, an invoice can appear approximate and could be challenged. A good invoice is clear, detailed, and precise.
Invoices being issued late can encourage customers to be equally relaxed about settling the debt. Demands should be raised immediately to impress upon the client the need for swift payment.
When is invoicing not appropriate?
Regular invoices are not suitable for all types of payment. For example, if there is no ongoing relationship with the customer, an invoice wouldn’t be used, or if payment is required upfront, a Pro-forma invoice would be more suitable.
Some industries use a lot of upfront payments for goods or services, such as retail and e-commerce. Merchants within these sectors require instant payment before they hand over or dispatch physical goods.
Those operating in the hospitality industry, such as pubs, bars, and cafes, also often take cash or digital payments from customers on the spot, so they rarely issue invoices.
Invoice advantages and disadvantages
Here's a fact about invoicing that you won't read in too many other places but one that you must be aware of and act on:
Whilst there are advantages and disadvantages to invoicing itself - the crucial fact is that the real advantages and disadvantages of invoicing are found in how you accept payments on your invoices.
Unfortunately, it's true that if you accept the wrong payment methods on your invoices, you will experience late payments and generate significant levels of manual admin. This will negatively impact cash flow and divert valuable resources from the core business to payment admin tasks.
However, if you use the right payment method to collect on your invoices, you get the opposite result. Your invoices will always be paid on their due date, eliminating late payments, and your payment process can be automated, seriously reducing the amount of manual admin required.
Let’s now look at some of the available methods for collecting payments on invoices and identify the right payment method that will be beneficial to your business.
Invoice payment collection methods
Payments have come a long way since the advent of the digital economy, and today there is a whole host of options available:
cash and cheques,
credit and debit cards
manual bank transfers
automated bank payments
The fact is that an invoice can be paid through any of the above methods, so the real question that businesses need to ask is: what are the advantages and disadvantages of collecting payment on invoices through these methods?
Cash and Cheques
Accepting cash and cheques on invoices is relatively unusual these days. In the past, cheques would have made up a significant portion of invoice payments, but these days they have mainly been replaced by digital payment methods.
Advantages: Cash is an instant payment, businesses get to meet customers, and there is no upfront financial cost to accepting cash. Cheques are slightly more convenient than carrying cash, although they are obviously not instant, but can be mailed, so they do not require the customer to be physically present.
Disadvantages: both are now outdated methods of settling invoices, and a high level of manual processing is required as both need to be banked and reconciled. Cheques are also susceptible to fraud and may be unfamiliar to younger generations. No time-saving automation is available.
Credit and debit cards
Accepting credit and debit card payments on your invoices will require you to set up online paylinks, use a payment processor or have a merchant account to collect the payment. You will also need a card reader to take card payments on your invoices over the phone.
Your invoice should contain a link to an online payment page, or the link could be in the email to which the invoice is attached, allowing the customer to pay with their card.
Advantages: credit and debit cards can be convenient methods of payment. People are used to paying online with cards, and the payment clears quickly - this can be as soon as the next day, depending on your payment service provider and payers card network.
Disadvantages: credit and debit cards have relatively high transaction fees and suffer from a payment failure rate of 10% - 15% since cards will expire or be lost and cancelled. Furthermore, payment failure rates and the general lack of visibility on card payment status create high levels of time-consuming financial admin.
Digital wallets such as Apple Pay, Google Pay, or Amazon Pay offer consumers a highly convenient way to pay for goods and services, however, digital wallet payments on invoices are not so common.
To accept digital wallet payments, you will first need to sign up for the respective service as a business, then set up the payment using the interface provided and email a link with your invoice. Digital wallet providers such as Google also offer invoicing services.
Advantages: digital wallets can be convenient payment methods but are typically used for online or high street purchases rather than settling invoices.
Disadvantages: processing fees will add up, making it quite expensive compared to other methods of collecting payments. Digital wallets are designed to make it easy and convenient for consumers to pay for B2C goods and services in-store and online and, as such, offer no real advantages to B2B businesses sending or collecting invoice payments.
Manual bank payment
Some form of manual bank payment, or transfer, is one of the most common ways to settle a B2B invoice.
Advantages: manual bank payments do not require any third-party involvement, simply requiring the recipient's banking details and access to an online banking app. Manual bank transfers are also cheap; in fact, they are typically free. They are also fast - once initiated, funds will arrive that same day or the next day at the latest.
Disadvantages: the disadvantage of manual bank transfers is a major issue that applies to all of the above methods of accepting payments on your invoices - you are relying on your customer to take action before you get paid!
All of the above methods are 'push payments' that put your customer in control of your payment process, meaning they decide when you get paid, resulting in late payments. This is a massive issue for businesses in general and SME B2B businesses in particular that negatively impacts cash flow, constrains growth and causes a lot of stress and strain for the business owner.
Business owners tend to view late payments on invoices as an inevitable part of doing business; however, there is a way to eliminate late payments on your invoices entirely!
Keep reading to discover the fast, simple and cost-effective solution that eliminates late payments on your invoices and ensures you get paid on time every time!
Automated bank payment
Automated bank payment is a 'pull payment' that puts you in complete control of your payment collection process and provides your business with an affordable, reliable and secure way to always collect payment on invoices on your due dates.
GoCardless offers automated bank payment on invoices to SMEs through the Direct Debit scheme. Direct Debit is simply an automated direct transfer of funds from one bank account to another. These transfers are generally recurring but can also be used for one-off payments.
Using the GoCardless merchant dashboard, you can quickly and easily set up payments in a few clicks and have a Direct Debit authorisation form automatically emailed to your customer. Once your customer has authorised the mandate, you can begin taking payments as agreed.
Watch the video and understand the benefits of Direct Debit in 60-seconds!
Eliminate stressful & costly late payments with automated invoice collection. GoCardless is quick & easy to set up & gets your invoices paid on time, every time.
“Overdue invoices are virtually non-existent and that makes us happy!” - George Ford, Director, Veriphy
Advantages of automated bank payment
Direct Debit is a highly reliable and flexible 'pull payment' that allows businesses to vary the amount, frequency and collection dates of payments without seeking further authorisation from the customer. This makes Direct Debit via GoCardless perfect for collecting payment on invoices that may be due on irregular dates and for varying amounts.
Always collect invoice payments on time
Once the customer has authorised the mandate, payments will be collected automatically on the due dates set by you, eliminating late payments and all the admin and stress that go with them
Automation saves time on manual payment admin
GoCardless offers over 200 integrations with accounting software packages that allow a large amount of payment admin to be automated along with payment collection. With no late payment admin to deal with and the ability to automate the bank reconciliation process as well, GoCardless saves merchants hours of manual admin time each month.
Consumer protections & less susceptibility to fraud
Furthermore, the Direct Debit Guarantee offers customers robust protections from unauthorised payments - any withdrawals that were not authorised or did not provide the required notice period are refunded to the customer's account.
Customers also benefit from the lower instances of fraud in bank payment methods compared to card payments which are more susceptible to fraudulent activity.
Invoicing may appear to be free or at least extremely low-cost; however, the indirect costs are significant.
Invoices must be raised and sent, and a bank reconciliation process must be completed once payments are received. Invoices inevitably have to be chased up as late payments are a big issue for businesses.
Chasing late payments is a stressful and time-consuming job that creates further manual admin that ties up your finance team or, even worse, takes you away from your core business tasks.
So the costs of manual invoicing are in time and resources, which ultimately costs money on salaries and hourly rates meaning that the average cost of processing an invoice in the UK is between £4 and £25.
By contrast collecting invoice payments via an automated bank payment method, such as Direct Debit,
Reliable, affordable & secure
So collecting on invoices with GoCardless using a bank payment method like Direct Debit is reliable, affordable and secure; it also eliminates late payments and time-consuming manual admin while at the same time offering payers convenience and security.
Watch the 60-second video below, in which Nathan, a GoCardless customer, talks about how automated payment collection on invoices via Direct Debit. Explaining that he is 100% confident that those payments will arrive as he is no longer reliant on his clients or their accounts departments to get paid.
GoCardless makes getting paid easy for small businesses. Automated invoicing & payment collection put you in control of when you get paid, making late payments a thing of the past.
"Customers paying invoices up to 4 months late drove us crazy. Now we can automatically take payment when issuing invoices." - Steve Leighton, Founder, Has Bean Coffee
Payer preference for Direct Debit
There are no practical disadvantages to collecting payment on invoices with automated bank payment, such as Direct debit via GoCardless.
Direct Debit has, historically, been difficult for SMEs to access via their bank due to onerous financial and regulatory requirements. However, now companies like GoCardless can offer a cost-effective Direct Debit service that takes care of all the legal and technical issues on your behalf, leaving you to focus on what you do best.
Some businesses are concerned that customers will not be comfortable with Direct Debit or will not want to switch from their current payment method. However, better protection from fraud and the Direct Debit Guarantee offers customers peace of mind that they are well protected.
Indeed, research on payer preference found that bank payment methods (such as Direct debit) were the most accessible and the most trusted compared to credit and debit cards, digital wallets and cryptocurrency.
Eliminate stressful & costly late payments with automated invoice collection. GoCardless is quick & easy to set up and gets your invoices paid on time, every time.
“Overdue invoices are virtually non-existent and that makes us happy!” - George Ford, Director, Veriphy