Collecting payment on time and as soon as possible to keep the cash flowing is the biggest concern for business owners.
That is the reason they look for various options to get paid quickly, one of those options is sending an invoice which is also the legal way to get paid.
On the other hand, customers also get clear instructions about making payments and payment due dates. Once you as a business owner send an invoice you must be expecting the payment within a certain number of days from the generated invoice date.
In spite of having the all-clear instructions mentioned in the invoice customers sometimes avoid making payments on time. In this case, the invoicing payment terms can help you out influencing customers to make payments within the given time frame.
MixBit asked business owners to share their tips for getting paid faster. And based on their suggestions we analyzed various invoices to come up with this article about payment terms and best practices of invoices.
Here are the 10 most reliable invoicing and payment terms that you must follow:
Estimations and Quotes
Most businesses follow this term before they start selling their service or goods to clients. In this section, you should simply estimate the cost of goods and services.
This will help clients compare the prices with others they have inquired about. Although this is not the final amount that you are going to invoice the clients, these quotes/estimations should have all the necessary information such as:
- Cost of products or services
- An itemized breakdown of the divided cost
- A time frame when the services or products will be delivered
- Estimation of taxes
Basically, estimations or quotes will give your clients a rough idea about the charges they might have to pay at the end of the services. Though it is not the final invoice, the prices may vary or drop in the actual cost depending on the client’s requirements.
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Terms of Sale (TOS)
Terms of Sale (TOS) are the payment terms, particularly for international traders where both sellers and buyers get agreed. Trades where shipping occurs, which party will be responsible for international duties and taxes, total cost, delivery details, payment method, and when the payment is due.
TOS includes all such essential components of any kind of invoice. Apart from the other aspects that have been recognized by the ICC (International Chamber of Commerce) regulations should be included in the TOS.
In other words, it is the agreement between the buyer and seller so that there won’t be any chance of confusion or disputes between both parties. And, they both clearly know what are their expectations from each other and they are satisfied with the requirements.
In your TOS you should include:
- A description of your service or products
- The estimated time of delivery
- Proffered payment methods you accept
- Parties responsible for taxes and fees
- Warranty and guaranty information
- Penalties for not following the rules (including both parties)
- Resolution of a dispute
With all of these points included in your TOS, you can avoid redundant problems in the future.
Payment in Advance (PIA)
Payment in Advance (PIA) is simply a payment type that clients make before you as a business owner provide your services or goods. It is very common for businesses or freelancers to ask for advance payments for the services or products they are going to provide.
For example, a freelance builder may ask for 50% advanced payments before starting a project to buy materials or other essentials. Such advance payments are asked to safeguard sellers or freelancers aligned with non-payments and help them cover out-of-pocket costs they need to carry out the project with ease.
It is a very common practice among small business owners and freelancers to successfully complete a project without any financial burden. Before, asking for this PIA you must check out your competitors and your industry’s common practices.
Immediate Payment
This term is connected with “COD” (Cash on Delivery) or “Payable on Receipt”, which means a client needs to make the payment at the same time when the seller delivers the products or services. If the client does not make the payment immediately through any type of payment mode the seller or service provider has the right to take back the goods of intellectual property.
This term is helpful for business owners to speed up the payment process, but on the other side, it is not popular among some clients because they are afraid that they might not be able to take tax benefits.
Net 7, 10, 30, 60, 90
This term defines that the total payment is due for payment in 7, 10, 30, 60, or 90 days after the invoice due date mentioned in the invoice. For example, if the invoice due date is August 10 and you have mentioned one of the most used payment terms, Net 60, then the client has to make a payment before October 9.
As a business owner, you need to use this term very carefully because it can be very confusing for the client and accounts payable teams if you use this term as “NET.” Instead, you can use “Days” for more clarity and customers know the exact days they have to make a payment. Additionally, it will be much better if you use, “Please make the payment within 30 days.”
2/10 Net 30
When you use “Net 30” in your invoice, it means your clients need to make a payment within 30 days. If the client makes a payment in ten days, they are eligible to get a 2% discount under the 2/10 Net 30 term. Of course, you can modify these terms as you want to. For example, you can increase the discount by 5-10% if the invoice is paid immediately.
To receive a good response, you should rephrase this term so that it does not create confusion among the clients. You can use a simple yet effective phrase such as, “Please pay within 7 days and save 5 percent”. This will make the offer absolutely clear and to the point.
Recurring Invoice
Generally, recurring invoice term is used for ongoing projects or services, such as web hosting, membership, or any kind of subscription which requires payment of the same amount each month.
Recurring invoices help you run a smooth cash flow for your business, which will save lots of time as you don’t have to generate the same invoice each month. Such monthly payment removes some of the insecurity and makes business owners’ life much easier.
Interest Invoice
You must be worried about the possible penalties you can charge when your clients do not pay the invoice on time. One of the most popular and common solutions to this problem is you should charge interest or late fees through interest invoices. You must remember that when you calculate the interest for the late payment you have to charge them based on the number of days they have passed the payment past due.
With these things in mind, an “interest invoice” is not just a reminder for a past due payment but it also includes the information about the applicable interest charges and new payment due date to resolve the due payment. You can resend such an invoice each month and keep adjusting the calculation so that it will repeat the added days in your past-due invoice.
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Invoice Factoring
If your client has not paid your invoice even after the reminders and you are in distressed need of cash you can consider invoice factoring. This is the term when businesses are allowed to surrender their invoices to any of the invoice factoring companies.
Once you hand over the invoice, you will receive 85% of the advance upfront within just one day. But, you also need to keep in mind that such companies may charge you fees for their service, so make sure you read their terms and conditions before you move ahead.
Progress Payments
This term is also known as a stage payment. Businesses or freelancers use this term when they bill their clients based on milestones. Once they reach their target, they send an invoice for getting paid. This also allows businesses to generate stable cash flow for large or long-term projects.
As a business owner, you will need to pay particular attention to the approval process so both parties are clear about the expectations and who must approve the invoice.
Final Thoughts
The above given ten invoicing and payment terms will help you know where you can use those terms and which one will be beneficial for your business. Whenever you are thinking of your invoicing and payment terms for getting paid, you must keep a few things in your mind such as you need to be polite and keep the terms short and sweet.
You should often encourage your clients by offering discounts on early payments. Having accurate interest rates for late payments and offering them various ways of making payments will make your payment collection process much easier. Hope you will find this article helpful.