Navigating Late Invoices

How To Set Realistic Invoice Payment Terms

It’s a pain when customers don’t pay their invoices on time, but it happens all the time. Just about every business will have to deal with late paying customers at some point.

Depending on how you set up your invoices, you’ll either have to chase late invoice payment a lot, or hardly ever. 

One of the key things in getting customers to pay invoices quickly is having good invoice payment terms.

TL; DR

Your invoice payment terms outlay your expectations for when and how customers pay your invoices. Good payment terms encourage healthy cash flow in your business, so it’s worth putting in the time and effort to come up with ones that work for you.

What are invoice payment terms?

Invoice payment terms, sometimes referred to as Terms o Trade, are the rulebook for your invoices. They outline the expectations for payment, including:

  • The forms of payment you accept
  • The currency you deal in
  • Invoice due dates
  • Late payment fees

They are essentially a written list of your invoice terms and conditions. 

They should be shared with customers or clients at the beginning of your relationship together, and included with any invoice to send so they can be easily referred to.

Which are the common payment terms on an invoice?

If you’re new to invoice payment terms, there’s more to them than you might think. It’s not as simple as sending an invoice and getting paid the next day. 

Read more: ​​The impact of unpaid invoices on business

Invoice terms and conditions can deal with areas such as:

  • Late fees. Invoice late payment terms can help to overcome the common causes of overdue invoices and discourage late payment. Outline when they apply and what rate they’ll be.

  • Early payment discount. Rather than punish late payment, you can incentivise early payment with a discount. There’s no reason why you can’t do both if you want.

  • Payment periods. Invoice due dates should be a standard time frame from when they’re sent, i.e. within 30 days, the 20th of the month etc. The shorter the payment period, the quicker you’ll get paid, but they shouldn’t be so short as to inconvenience your customer. The payment period should be a time frame that is agreed with your customer prior.

  • Flexible payment options. There are a lot of payment options in today’s world, and some customers will have a preferred method. If you accept that method of payment, you make it easier for customers to pay on time.

Invoice payment terms template

When drafting invoice terms and conditions, consider using the following clauses as an invoice payment terms template:

  • [Your business name] will submit an Invoice at the end of each month in accordance with pricing as specified in the Contract. [Customer name] will make payment to [your business] within 30 days of receipt of the invoice(s).

  • Any overdue payment will be subject to overdue interest at the rate of 10% per annum. An invoice is considered overdue if payment is not received by [your business] by 5pm on the expressed due date on the invoice.

Read more: Navigating late invoices

  • [Customer] and [your business name] have agreed on the payment method of [METHOD]. Payment must be remitted by the stated method. Payment via any other means must be approved in writing in advance, and if that other method results in additional transaction cost, [customer] will be responsible for meeting that cost.

Plainly, these clauses can be amended to suit your preferences as required. 

Benefits of setting payment terms on your terms

Payment terms are like any other form of contract in that they can take some time to compile and they may not be used often. However, when you do need to refer to them, they can be incredibly useful.

Control when you get paid

Unpaid invoices place cash flow pressure on your business, but setting clear expectations on when payment is due helps to create reliability over your income. 

By controlling your payment terms so they suit you, you give yourself a much better chance of being paid as you hope to be. Ideally, you should look to find the shortest payment period that’s not inconvenient for customers. 

Having short payment terms encourages customers to pay you first. If they have multiple bills to pay, they’ll prioritise the ones that are due soonest. It’s also good cash flow practice to avoid paying bills until the day they’re due, so you have cash on hand as much as possible. Shorter payment terms work to your advantage in both of these scenarios.

To start with, it may be worth drafting payment terms that work best for you, then negotiate from there.

Control how you get paid

By setting your payment terms yourself, you get to outline the way you want to be paid. The irony is, the best way to be paid is the way that suits your customers best. 

By allowing them to pay you via a method that’s most convenient for them, customers are more likely to pay invoices promptly.

Predicting payment indicates healthy cash flow

When dealing with your business’ cash flow, predictability is a huge benefit. If you know how much money is coming in and going out, you can recognise when you need to rein in your spending or look for options such as invoice financing to stimulate cash flow.

You won’t end up in a situation where all of a sudden you realise cash flow is negative and you can’t afford to pay your bills.

Negotiating and setting realistic invoice payment terms

There are a few key ways to set up good payment terms that enable good cash flow within your business:

Prioritise who you negotiate with

Only negotiate payment terms with a few people at a time. This means you don’t get overwhelmed and lose track of where things are at with different customers. 

You’ll also learn from each negotiation what works for customers and yourself, and apply those lessons going forward.

Start your negotiations with your suppliers, particularly the ones you spend the most money with. Getting good terms for these suppliers will have the biggest impact on your cash flow.

Set payment arrangements early

Don’t start working with customers until you have payment terms ironed out. Make it a core detail that you work through alongside things like prices and timelines.

Be honest

Be careful to mention that your payment terms are important to you because you’re trying to promote positive cash flow to grow your business, not because you’re in any sort of financial difficulty. 

You can also point out to suppliers that with better cash flow, you’ll be in a better position to purchase more from them.

Do your research

Find out what are the typical payment terms that suppliers in your industry will be used to. 

In agriculture, 14-day payment terms are common. In construction, payment terms can be as long as 90 or even 120 days. Knowing what’s normal helps you to know what customers will expect, and what’s most convenient for them.

It doesn’t mean you have to stick with the average, but you can prepare your argument for why your terms are different to others.

Send invoices promptly

The sooner you send an invoice, the sooner it’ll be due and the sooner you get paid. It’s that simple.

Invoice in stages

If your work with a customer is on an ongoing basis (i.e. longer than one month), it doesn’t mean you can only invoice once the work is finished.

Arrange to invoice at a regular time period, or at the end of crucial stages of work. This just means you can stimulate cash flow throughout the project rather than wait for one large payment a few months down the track.

Allow for electronic payments

Having a ‘pay now’ option on the invoice allows customers to do exactly that. 

By linking to direct debit options or a third party payment provider, customers don’t have to schedule a payment for later or remember to pay it another time. All of that increases your chances of getting paid sooner.

Make payment terms shorter

Payment terms of 30 days are the traditional norm, but you don’t have to settle for that anymore. Many businesses expect payment within 14 days. 

As with sending invoices promptly, the sooner an invoice is due, the sooner you’re likely to be paid. Be reasonable though – a 1-day payment term isn’t likely to go down too well with your customers.

Create tactful late reminder emails

When invoices aren’t paid on time, often it’s simply because customers have forgotten to process them. Create tactful invoice reminders for late paying clients in your invoicing software and automate them to go out as soon as an invoice becomes overdue.

This saves the hassle of having to chase up late invoices manually.

Charging late fees for unpaid invoices

If you want to charge late fees for unpaid invoices, it’s a legal requirement to spell this out in your payment terms in advance. You can’t just spring late fees on a customer without having communicated them beforehand.

Late fees are a great way of encouraging customers to pay invoices on time and saving you the time and effort of chasing outstanding invoices. The money you make on late fees is negligible, but it makes it in the customer’s interests not to allow an invoice to become overdue. 

A customer with multiple invoices and bills due will prioritise the ones that have late fees so it doesn’t end up costing them more. This is one crucial way that late fees help to get invoices paid faster.

If you don’t like the idea of charging customers extra, offering an early payment discount also has the same positive effect on cash flow.

Take home message

The best invoice payment terms for businesses are the ones that work for both you and your customers. By nurturing and growing a positive customer relationship that’s based around satisfying both of your wants and needs, you’ll find your customers will be happy to pay your invoices promptly. 

Payment terms don’t have to be set in stone either. If you find you’re dealing with more and more late-paying customers, you can always renegotiate your payment terms. Keep an eye on how good individual customers are at paying invoices when they’re due and make changes where they’re needed.

If you do find late paying clients are putting pressure on your cash flow, consider using invoice financing. Invoice financing is lending that’s based on the value of your invoices, and creates the same effect as having customers pay invoices straight away.

Find out more about how invoice financing works, and how it can benefit your business today. 

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