For small businesses, cash is king. It
doesn’t matter how many clients you have or how much money you’ve been
promised: if you don’t receive it before your own bills come due, you’ll be in
Late payments are a common problem for small businesses. According to a 2012 survey by the National Federation of Independent Business, 64% of small businesses had invoices that had gone unpaid for at least 60 days.
In a previous tutorial, I covered some tips for getting paid on time. In today’s tutorial, we’ll look in more detail at the subject of payment terms. What are the different options, and what does the data show about which terms help you get paid more quickly?
We’ll go through all of that, so that in the end you’ll know your EOM from your 2/10 Net 30, and more importantly you’ll be positioned to get cash flowing your way more quickly and reliably.
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1. What Are Invoice Payment Terms?
When you send out an invoice, you’re telling your client how much money you expect in return for the work you’ve done. The payment terms specify when that money is due and how it should be paid.
So the most important aspect of the payment terms is the timeframe in which you expect to be paid. But as part of the payment terms, you can also specify what will happen if people don’t pay: perhaps a penalty or interest to be applied after a certain date. Or, if you want to be more positive, you can offer a discount to anyone who pays early. You can also specify payment methods.
We’ll look at how those options work in the next section, as well as examining which ones work best. But for now, let’s demystify some of the common payment terms you might come across:
This is a common term, which simply means that the client should pay 30 days from the invoice date. You can vary the number as much as you like: Net 7, for example, means that payment is due seven days after the invoice, and Net 15... well, you get the idea.
2/10 Net 30
This is a way of offering a discount. The “Net 30” part is the same as above: payment is due within 30 days. But the “2/10” part means that if they pay within 10 days, they get rewarded with a 2% discount.
This is short for “End of Month”. This might be good to use if you want to make sure all your invoices are paid in the same month as you completed the work, but it has some disadvantages. If you send out an invoice right at the end of the month, for example, you’re giving a client a very short time in which to pay, whereas at the beginning you’ll be giving them more time. It’s probably best to use this term only if you always send out invoices on the same day of the month.
This means the 15th of the month following the invoice date.
This means that you expect payment immediately. It sounds as if it should result in prompt payment, doesn’t it? The reality is a little different, as we’ll see in the next section.
You can look through this fuller list of invoice terms, but really you don’t need to worry too much about all the terminology: you don’t need to use it on your invoices. Instead of “Net 30”, for example, you could simply write, “Please pay within 30 days.” But it’s good to be aware of some of the terms, in case your clients and suppliers use them.
Keep in mind, also, that these are just some commonly used terms. You can vary things like the timeframe for payment and any incentives or penalties as much as you want.
The most important thing, however, is to understand which terms work best. We’ll look at that in the next section.
2. The Best Invoice Payment Terms to Avoid Unpaid Invoices
So now that you know some of the options you have and what they mean, it’s time to decide which ones to use for your business.
The terms used, and the expectations around them, can vary a lot by industry and the type of work you do. Web designers or developers, for example, might be able to specify that the site or app they’re working on won’t go live until they receive full payment. But for other types of business, the industry norm may be to offer to wait 30 days or even longer.
By all means study the norms in your industry and ask around to see what other businesses are doing. But don’t feel limited by that. If you want to use different terms, and you can justify to your clients why those terms are fair, then go for it.
For example, “Net 30” has become the standard in a lot of industries where it really isn’t suitable. For an old-fashioned manufacturing firm, Net 30 is quite reasonable. Let’s say a firm sends out a big batch of widgets to a customer, and then mails out an invoice. They have to allow time for the customer to receive the invoice, to check through the huge batch of widgets and make sure everything is in order, to send the invoice through their accounts department and have a check written and mailed back. These things take time.
But contrast that with a design firm that delivers both a completed design and an invoice by email, offering an online payment method like PayPal. The client receives both product and invoice instantly, and after checking that everything is OK, there’s really no reason why they can’t make the payment right away. Giving them a month to pay is basically just giving them an interest-free loan.
So in that case, you could make a convincing case that seven days is ample time.
Which Payment Terms to Use: What the Data Says
Some of the companies that provide invoicing apps have used the masses of data they process to figure out which payment terms are most effective at getting invoices paid on time.
Keep in mind that most of them are from a range of different industries, so they may not all be appropriate for your business. But they do reveal some interesting insights about what works and what doesn’t.
If You Want to Get Paid in a Month, Ask to Get Paid in 13 Days
That implies that whichever payment terms you choose, you should add on another two weeks to estimate the actual date of receipt. Xero’s data showed that if you want to get paid within 30 days, you should specify payment terms of 13 days or less.
The Wording Matters
A simple “please pay your invoice within” or “thank you for your business” can increase the percentage of invoices that are paid by more than 5 per cent!
Also, some of the terminology we covered in the last section is not as effective as simpler language. Writing “30 days” instead of “Net 30”, for example, resulted in faster payment of invoices. If you want people to take an action, asking them in a completely clear way is usually a good idea.
Don’t Ask for Payment Upon Receipt
Both the Xero and FreshBooks studies are in agreement: asking for immediate payment doesn't work.
In the Xero study, invoices asking for immediate payment were actually paid after almost 20 days on average. And in the FreshBooks study, it was more than 30 days. FreshBooks concludes:
Most people seem to interpret “upon receipt” as “whenever you feel like it”. It’s as if they receive an invoice with the words “payable upon receipt” and immediately dump it into the “whenever” pile.
So although asking for immediate payment may seem like a good idea, it’s better to specify a particular number of days, to focus your clients’ minds on a fixed deadline.
Don’t Charge Interest
Here’s another surprising conclusion from the FreshBooks study: charging interest on late payments results in even later payments. It seems that the threat of interest doesn’t act as a deterrent, and may actually prompt people to compare your relatively low penalty interest rate with the high rates of things like credit cards, and figure they’re getting a good deal by delaying.
Offer Online Payments
This last one shouldn’t come as a surprise: offering online payment methods results in much faster payment. This from Harvest:
According to our data, Harvest invoices with an option to pay via PayPal receive payments nearly 16 days faster (twice as fast) than invoices without an online payment option.
This is particularly effective if you use an invoicing app, in which payments are integrated so that the client can pay in a few clicks. But even if you’re sending out a paper invoice or emailing a PDF, making it easier and quicker for your client to pay is a no-brainer.
3. Other Tips for Avoiding Overdue Invoices
In this tutorial I’ve talked about invoice payment terms, but the client shouldn’t learn about your terms through the invoice. You should set out your payment terms right at the beginning of the relationship, so that there are no surprises later on.
When you’re setting up the contract with a new client, be sure to include your payment terms. You may want to set up milestones for the project, or charge a percentage of the fee upfront, before work begins.
Whichever structure you choose, be sure to get the client’s agreement at the very beginning, and then you can follow up with invoices for each payment later on, and the terms will be simply a reminder, not a new point to be discussed or disputed.
When you’ve done the work, it’s important to send out the invoice promptly. A study by FreeAgent found that:
Surprisingly, sending an invoice quickly even appears to override the terms that you’ve asked for payment - invoices that were sent up to 15 days after finishing the work got paid quickly, even if the payment terms were longer.
On average, invoices sent out within a week were paid within five days, but a week’s delay doubles the waiting time: invoices sent out after two weeks were paid after 10 days.
This is probably due to a combination of two factors: it’s best to contact the client when the result of your good work is still fresh in their mind, and also by invoicing quickly, you’re showing that you take the payment seriously, and that they should too. If you delay, on the other hand, they probably will too. So get that invoice out quickly!
For more tips, including what to do if the client doesn’t pay on time, see my recent beginner’s guide to invoices:
In this tutorial, you’ve learned about the best payment terms to use to avoid overdue invoices.
We started with a look at what invoice payment terms are, including definitions of some common terminology.
Then we looked at the best payment terms to use. We saw that it’s good to research industry norms, but that you shouldn’t be restricted by them if you can make a good case for something different. We looked at the results of some studies, to see which terms performed the best.
Finally, we covered some other tips for getting invoices paid on time, such as establishing payment terms in the contract, and sending invoices out promptly.
You now know what invoice payment terms are, and which ones tend to work best. The final decision is up to you and your individual business needs—there’s no one-size-fits-all solution. But with the survey data and other information included here, you’ll be in a better position to make that decision for yourself.
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