How To Set Invoice Payment Terms
By Matt Reims
Cash flow for many small businesses is the heart and soul of the operation. Of course, effective cash flow can’t occur if you’re not getting paid on time. If this is an issue, or if you’re just setting up your business, the first step should be to look closely at the payment terms of your invoicing process. Establishing payment terms that are crystal clear and communicating them effectively to your customers will help set up a framework for more consistent, healthy cash flow.
Here are a few key points to look at when you are setting your payment terms.
Timing
Establishing appropriate timing is critical to the invoice payment term process for small businesses. Set up due dates that you’re comfortable with; ideally, the date will be one that gives your client a reasonable amount of time to pay you but is soon enough so your cash flow isn’t interrupted.
Net 30 terms are most typical. This simply means the net amount is due within 30 days of the invoice date. Although net 30 terms have been the industry standard for some time, more and more small businesses are setting tighter deadlines. One of the main reasons is that many customers often run past the 30 days. Waiting a full month to be paid can make it hard enough to manage cash flow effectively. Once payments go past 30 days, it can become challenging, particularly if you’re on payment terms yourself for certain products or services.
So how do you know what the appropriate number of days should be? With a well-thought-out and structured payment term plan, and a good relationship with your customers, you can feel good about setting terms that work for you. Depending on your business type, 20, 15, and even 10 days should not be out of the question.
Wording
Professional, courteous, firm
Small businesses often walk on eggshells when it comes to asking for money. This is understandable. Your customers are everything to you, and you don’t want to jeopardize those relationships. Getting paid on time, however, is critical to the health of your business. You should not be afraid to broach the subject. Be polite and professional, but also firm. When setting your payment terms, and/or when sending invoices, include language like “Please pay your invoice within …” And thank them for their business. Approaching the subject this way will make your invoice feel less like a demand and will help set expectations. The extra effort to be professional and courteous will reflect well on your business’s brand and image.
Be clear about the terms
Don’t assume everyone you deal with is business-savvy. Make sure your payment terms are spelled out as clearly as possible so even the most novice customers understand when you’re expecting their payment. Phrasing like “net 30” may not make sense to everyone, and “upon receipt” could be left open to interpretation. Instead, provide an exact time frame that’s easy for anyone to understand. Something like “Your payment is due in 20 days” gives your client an exact day to point toward and eliminates any confusion.
Itemize the invoice
People are more willing to part with their money when they know exactly what they’re paying for. When you put your invoice together, don’t just include one line item for the total amount due and the payment terms. Instead, include a list of line items: a description of what you delivered, the price per unit, the total price, and the sales tax. When your clients can see exactly what they’re paying for, your payment will most likely come in faster.
Get the invoice out immediately
Once you’ve delivered your product or completed your service, get that invoice out the door right away! Your invoice payment terms might be just seven days, but it doesn’t matter if your customer doesn’t have the invoice to pay.
Invoicing may not be the most enjoyable task for some small business owners, but remember — the longer you wait to send out an invoice, the longer it will take you to get paid. You can speed up and improve the process by using cloud accounting software with automated features and invoice templates that make them easy to send out.
Don’t wait until the invoice is past due to connect
It can be uncomfortable to remind someone that they owe you money, but which conversation would be easier: a friendly reminder that an invoice due date is approaching or a call to say a payment is two weeks past due?
Running a small business often requires juggling multiple tasks across a variety of departments. It can be hard to keep track of who owes what and when. Cloud accounting software can help automate the process.
Money
Your invoice payment terms come down to when the money is due and how much. The invoicing process isn’t complete until a check, credit card, or online payment confirmation is in your possession. How you present the client’s payment options could determine how quickly you’re paid.
Offer to split large invoices up
You’d love to get paid in full as fast as possible, but sometimes a customer is unable to pay a big bill all at once. Would you rather wait until your client can put the funds together to pay you at once or take what they can pay now and get the rest at a later date? Remember, cash flow is king for a small business. Work with your customer and agree to spread the bill over multiple invoices if they can’t pay it all right away. You’re much more likely to get paid on time, and when that client needs similar products or services in the future, they’ll probably turn to you again because of your flexibility.
Offer discounts for early payments
It can be tough to give up money, especially for a small business, but a small fraction off the amount due could be worth it to get paid ahead of time. You don’t have to discount much; maybe 1-2 percent off the total invoice if it’s paid within an agreed-upon amount of time before the original due date. Your client will be happy to get a discount, which could lead to repeat business.
Setting clear and consistent invoice payment terms can help improve the rate of getting paid on time — leading to positive cash flow for your small business. If you’re clear about the terms, lay out exactly what your client is paying for, and present flexible payment options, you’ll likely spend less time worrying about getting paid.
