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Business Advice/Guide

Are Your Invoice Payment Terms Realistic For Your Customers?

When you get into business, understanding how invoicing works is one of those things that takes more time and effort than perhaps you first thought.

How often should you invoice? How long should you give customers to pay invoices? Should you offer a prompt payment discount?

These types of questions are common, and if you’re having issues with late invoice payments, it may be because your invoice payment terms need adjusting.

TL: DR

Take the time to set invoice payment terms – you will be grateful for it. Robust terms help to promote prompt invoice payment and create a standard to refer back to if you have any issues.

Invoicing issues that businesses face

Many businesses have issues around invoicing – particularly small businesses.

Nearly half of all invoices are paid late. More than a third are more than two weeks late. 

The impact of unpaid invoices on businesses is real. Cash flow is critical to enable businesses to pay bills, pay staff and buy stock. Without it, it can be impossible to operate. 

You can use services such as FundTap to bring forward payment of invoices, but it’s still best practice to do what you can to promote prompt payment of invoices.

Understanding how to structure invoice terms and conditions can help to make it easier for customers to pay invoices promptly.

What are payment terms on an invoice?

Invoice payment terms outline how you expect your business to get paid. They can include details such as:

  • Forms of payment you accept and don’t accept
  • When you expect to be paid
  • Late fees that may apply – when they’re charged and how much they are
  • The currency you deal in (for those that do business across borders)

Invoicing terms and conditions can be agreed in a signed contract before commencing work, or you can outline invoicing terms on the back of a physical invoice. These are two common ways of communicating them with customers. 

In the past, 30 days was considered the norm for when payment was due. It’s called net 30 payment terms. This standard was set when invoices were sent manually and it took longer to make a payment. In the days of electronic invoicing and online banking, it’s not unreasonable to expect payment sooner than that. 

Invoice terms can be laid out in an invoice itself, and ideally would be agreed with customers in advance. Springing a late fee without the customer knowing they’re possible may jeopardize future business. 

You want to get paid on time, but you also want to maintain positive relationships with your customers. This is one of the many balancing acts small business owners have to deal with. 

7 Best invoice payment terms for businesses

So what are the best payment terms and conditions to get invoices paid quickly? These are some of the best techniques to improve business cash flow:

  • Have short payment terms

Knowing many invoices are paid late, shorter payment terms can help to get paid faster. Consider two invoices that are paid the day they were due. One was due within a week, but the other was due in a month. Even if they’re paid late, the payment is still made much sooner with a shorter due date. 

  • Send invoices promptly

The sooner you send an invoice, the sooner it’s due and the sooner it’ll be paid. Sending an invoice soon after work is completed means it’s still fresh in your customer’s mind. It shows them you’re on the ball and encourages them to be the same with making payment.

  • Pay attention to the wording

The wording of invoice payment terms matters. Even saying “please” and “thank you” can result in customers paying invoices quicker. Sending an invoice may be part of the nitty-gritty of doing business with someone, but every interaction you have with customers is a chance to build a positive relationship that’s based on good business practices. 

  • Enable electronic payments

The easier it is to pay an invoice, the more likely a customer is to pay it – especially if they can do it then and there. For example, if they can click a Pay Now option on the invoice, that’s easier than relying on them to remember to submit a direct debit manually. 

  • Include late fees (and enforce them!)

Dealing with late invoice payments can be frustrating and time-consuming, dragging you away from important tasks. Late fees help to avoid these problems, and can be a great incentive for customers to pay an invoice on time. 

Make them clear on an invoice and, as mentioned, make sure they know about them in advance. Don’t waive late fees either – they’ll lose their effectiveness if customers see them as an empty threat. 

  • Reward early payment

Similar to the previous point, offering a discount for prompt payment is an incentive for customers to pay sooner. A common early payment discount is to offer 2% off the total invoice if it’s paid within 10 days. This is an invoice terms example that will cost you a small amount of money, but it can be worth it to encourage better cash flow. 

  • Invoice in stages

If you’re doing a large piece of work for one customer, you don’t need to wait until the end to send an invoice. Doing that can put pressure on cash flow. Splitting your invoicing into stages can help to keep money coming in so you can pay bills, staff and other costs.

As above, it’s important to communicate this in advance so your customer doesn’t receive an invoice they’re not expecting. 

Is your invoice payment terms realistic for your customers?

Invoice payment terms outline business expectations, but they need to work for customers too. If they don’t, there’s a much higher chance they don’t pay invoices on time. It’s critical businesses set realistic invoice payment terms in their customers’ eyes.  

Small business payment terms may commonly expect payment in 30 days or less, but the idea of what’s realistic can differ depending on your situation. If you’re invoicing a large customer, you may not be able to dictate terms at all. Customers in one industry may be used to longer payment terms. 

For example, those in the construction industry can have terms of 60 or even 90 days. Some commodity businesses expect payment within a few days of invoicing.

As a business owner, you probably know what’s the norm in your sector. Stick to what customers expect and you’ll have less risk of late payment. If you’re not sure, do your research – ask trusted customers what’s realistic to them, or talk to others in your industry. 

Creating an invoicing system that works best for your business

By putting in the work to create a good invoicing system, you can avoid many of the common invoicing issues. It may not seem like the most fun thing to do, but invoicing systems can be influential in eliminating late payments and encouraging better cash flow in your business.

It’s even more important to do this in small businesses. Big businesses have large bank accounts and dedicated finance teams that mitigate the issues of poor cash flow. However, small businesses often operate on smaller margins and more volatile cash flow. This means they feel the impact of late invoice payments even more.

Small business owners have a lot of competing priorities, and it can be hard to know what to focus on. You have even less time to spend chasing up late invoice payments, and having to put other things on hold to get in touch with tardy customers creates stress in other parts of the business. 

Many of these issues can be avoided by using FundTap as part of your invoicing system. FundTap essentially purchases your invoices from you, which means you get paid within hours. When your customer pays the invoice, the balance is direct debited from your account – there’s no need for you to do anything.

Using FundTap, you can get an advance on work you’ve done and use that cash flow to grow your business even more. For example, FundTap customers have used the positive cash flow they get to grow their revenue by an average of 54% in the last two years.

To find out more, book a free demo or get started with a free account in less than five minutes today.  

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