Last editedApr 20244 min read
Getting paid on time is vital for the success of your business. If you don’t define the right terms under which your customers must pay you, and don’t formally agree on these with them, then you increase your likelihood of late payments, poor cash flow and an unhealthy financial position for your company.
This guide explores what payment terms are, and how enforcing them helps drive financial efficiency and boost your cash position.
What are invoice payment terms?
Invoice payment terms are the contractually agreed terms of payment between a business and a customer. Commonly, invoice terms – or payment terms – refers to when payment is due relative to the date on which goods or services were delivered, or when an invoice for those goods or services was delivered.
According to research by Kriya, 39% of invoices sent by UK companies were paid late in 2019, The average value of these invoices was £34,286. This means that, overall, UK businesses suffered from approximately £34 billion of late payments.Â
That sort of money can make a significant impact on your cash flow. It can also make your balance sheet look weaker than it should. In short, late payments are not a positive sign for the long-term growth or profitability of your company.
It’s therefore essential to state explicitly when you expect your customers to pay you. Also ensure that your expectations regarding payment are included in your contract with the customer. These expectations are generally referred to as payment terms.
To combat this, it’s essential to clearly define when you expect your customers to pay you, and make this a contractual element of your invoices. This, in a nutshell, is the function of payment terms.
Payment terms should be included in any contract you draw up with a customer. They should also be clearly visible on every invoice you send out. Your payment terms outline:
The invoice due date – the date by which the payment is due should be clearly shown on the invoice. This ensures that the customer’s accounts payable team knows when to action payment.
The payment method and account details – specify how you accept payment. With Direct Debit, once the mandate is set up, just tell the customer when they will be charged. With other payment types (e.g. bank transfer, card payment, or digital wallet) you may have to provide additional information. Alternatively, use invoicing and accounting software that supports one-click payment buttons within e-invoices.
The currency you wish to be paid in – if you’re trading outside your own territory. Even for UK domestic transactions, specify that you wish to be paid in Pounds Sterling. For international transactions, highlight the currency used clearly.
Any other payment conditions – this could include late payment fees you charge for overdue payment, or discounts you offer for early payment.
Setting up your invoicing in the most efficient way is an integral part of improving payment times, and having your payment terms stately clearly and unequivocally on your invoices makes it easier to chase up any late payments.
How to collect payments with GoCardless
1.
Create your free GoCardless account, access your user-friendly payments dashboard & connect your accounting software (if you use one).
2.
Easily set up & schedule one-off or recurring payments via payment pages on your website checkout or secure payment links.
3.
From now on you'll get paid on time, every time, as GoCardless automatically collects payment on the scheduled date. Simple.
What are standard payment terms?
Standard payment terms set out the usual payment times for your customers, and may vary depending on where your business is based, what’s seen as ‘normal’ within your given sector or industry, and what credit terms you’re comfortable agreeing with your customers.
For UK businesses, standard payment terms are 30 days from the date of the invoice being raised, whereas Scandinavian businesses are more likely to expect shorter 14-day payment terms. Some industries also differ, with standard payment terms in a sector like construction more likely to be 60 or 90 days from the invoice date.
Even with standard 30-day terms, many businesses are still not paid on time. The average invoice was paid in 38.3 days for 30-day terms, according to the latest stats from Xero’s Small Business Insights.
What does 'net days' mean in payment terms?
Net days is payment terms terminology meaning when payment is due relative to the date goods or services have been delivered.
Common forms are net 10, net 15, net 30, net 60 and net 90 (also written as net 10 days, etc.). For UK businesses, standard payment terms are 30 days – this could be designated as net 30 or net 30 days, indicating that payment is due on the invoice amount 30 days after delivery of goods or services.
The format of net days designation may also include a discount for when payment is made early, to promote a healthier cash flow for the seller. An example of this format in use is ‘5% 10, net 30’, where the seller is offering a 5% discount to the buyer if they pay in full (in this case, 95% of the invoice amount) within 10 days of the goods or services being delivered. If they take longer than 10 days to pay, they lose the discount.
Example payment terms for invoices
Different terms can be offered, depending on how much credit you want to offer your customers, so usual payment terms can include the following (presuming invoices are issued on the date goods or services are delivered):
| Payment term | Meaning |
|---|---|
| PIA | Payment in advance |
| Net 7 | Payment seven days after invoice date |
| Net 10 | Payment ten days after invoice date |
| Net 30 | Payment thirty days after invoice date |
| Net 60 | Payment sixty days after invoice date |
| Net 90 | Payment ninety days after invoice date |
| EOM | End of month |
| 21 MFI | 21st of the month following invoice date |
How to improve your payment terms
Having payment terms in place goes a long way towards formalising your payment and credit conditions for paying customers, but they can’t improve your payment stats and aged debt single-handedly. Get proactive with other late payment strategies:
Use online invoicing to speed up payment – Most modern cloud accounting platforms also include online invoicing, allowing you to quickly email invoices directly to your customer’s finance team and speeding up the payment process.
Make it easy to pay you – Using the latest modern payment gateways and payment technology gives your customers more ways to settle their bill. A solution like GoCardless will automatically collect the payment via Direct Debit, meaning your customers don’t have to lift a finger.
Offer healthy discounts for early payment – Using net days for your payment terms means you can offer discounts to early payers.
Use tech to predict payment times – Cloud forecasting tools, such as Fluidly or Futrli, can predict when customers are likely to pay, giving your finance team the ability to prioritise the right customers and debts when it comes to credit control conversations.
Review your customer base and sack the late payers – This might sound drastic, but if a customer consistently pays you late, they may be more of a threat to you than an asset. Periodically offboarding late-paying customers gives you more time to focus on your most value-adding customers, which will benefit your business in the long term.
How GoCardless can eliminate late payments
With GoCardless, you can add a payment button directly into your finalised sales invoice, allowing your customers to pay you with one click.
Even better, because GoCardless is designed to make recurring payments simple and painless, you can collect future payments from your customers without them needing to lift a finger.
And because GoCardless can integrate with your cloud accounting platform, we’ll also automatically reconcile all received payments with your invoice, cutting down on the financial admin and streamlining the whole process.
Take back control of your cash flow - get started with GoCardless today.
