Last editedNov 20222 min read
Do you send invoices to your customers before or after work has been completed? The timing of your invoicing process determines whether you’re paid in arrears or in advance. There are pros and cons to both, so it’s useful to gain a better understanding of what billing in arrears entails. In this guide, we’ll cover the benefits of arrears billing as well as a few tips to help mitigate the risk of late payment.
What does billing in arrears mean?
Billing in arrears means that you send a bill to customers after a job is complete. This is in contrast to billing in advance, which requests advance payment to cover the cost of expenses and supplies. When you are paid in arrears, you don’t receive this payment until after you’ve delivered your goods or services.
Invoices or bills sent in arrears are not necessarily late. For example, imagine that a plumber comes round and instals a boiler for a homeowner. After it’s installed, he emails the homeowner an invoice. Even if the homeowner pays the invoice on the spot, it’s considered paid in arrears because it’s sent after the work has been carried out.
On the other hand, the term ‘payment in arrears’ is used in reference to overdue payments. This might be due to factors such as errors on the invoice, incorrect delivery, or a dispute regarding the work completed.
What are the pros and cons of being paid in arrears?
Billing in arrears makes sense for many businesses. As a business owner or consumer, you probably are billed in arrears for things like utilities. This ensures you pay for the service you’ve received, rather than underpaying or overpaying. Billing in arrears is often more efficient for ongoing services where usage varies.
Advantages of arrears billing
Reduces the need for issuing refunds for advance overpayment
Ensures full payment for products or services provided
Offers a high level of flexibility to both business and buyer
Disadvantages of arrears billing:
Impacts cash flow with delayed payment cycles
Creates the need to send payment reminders to customers
Risk of missing payments if the customer does not pay
Alternatives to being paid in arrears
The primary alternative to billing in arrears is billing in advance. When you bill in advance, you’ll send the invoice for the full amount due before work begins. While this is more advantageous to the business, it requires a high level of trust from customers who might be wary of paying for something they haven’t received. Additional options include paying on retainer, using a scheduled payment calendar, or asking for an upfront deposit.
How to reduce the risks of arrears billing
If you decide that you prefer to be paid in arrears rather than use these alternatives, there are plenty of ways to mitigate the risk.
Run a credit check on potential customers before entering any new contract.
Automate your invoicing process with software.
Schedule regular payment reminders to help customers pay their debts.
Make your payment terms very clear at the top of the invoice.
Offer a selection of payment methods and use embedded payment links.
Set up a recurring payment schedule with automatic payment collection.
GoCardless offers a simple way to minimise invoicing risks. We use Direct Debit to put businesses in control over their payments. You can collect invoice payments on the day they’re due directly from your customer’s bank account. Our Success+ intelligent retries feature collects up to 70% of payments that fail the first time around, helping to mitigate any associated risk of non-payment. We also integrate with over 300 partners including top accounting software like Xero and QuickBooks for full visibility over invoices.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.
