Invoice Payment Terms—Definition, Examples & More
February 28, 2023
Invoice payment terms are a staple of all bills and invoices freelancers, contractors, and other businesses send to their clients. They break down the pricing of their goods and services and give them better control over their cash flow.
More importantly, clearly specified invoice payment terms help businesses know how quickly they can expect to be paid, so they can plan for future expenses accordingly.
If you want to find out more about invoice payment terms, you’ve come to the right place!
This article will list the numerous benefits of invoice payment terms, show you the best practices, and teach you how to make an invoice effortlessly!
Let’s dive straight into it!
What are Invoice Payment Terms?
The failure to track customer payments proves detrimental to any business operation.
Invoice payment terms or payment terms contain essential information needed in any transaction, such as the payment due date, specific payment terms, and all other contractual agreements between the buyer and the seller.
Payment terms may be used to hold customers accountable for their purchases by ensuring they provide the payment equivalent to their order. At the same time, the terms give your accounts payable department an idea of when to follow-up customers for their payments.
According to the Small Business Administration, freelancers can benefit as well from using invoice payment terms, particularly when they supplement them with a legally binding contract. The contract must contain an agreement on the goods offered and accepted between all involved parties in exchange for something of value, such as cash or services.
Invoice Payment Terms Components
Some of the key components of invoice payment terms include:
- Invoice date. Every invoice has a date that states when it was issued.
- Currency. Specifying the currency in your invoice payment term is especially essential if you are selling your services or shipping goods internationally.
- Preferred payment methods. This information enumerates all the different types of payments that your business accepts. Some of the most common payment methods include bank transfer, credit cards, digital wallets, and online transfer.
- Total amount owed. Provide the total amount due that the customer must pay in exchange for the goods or services they ordered.
- Payment due date. The payment due date specifies the latest date when a payment can be made or sent by a customer before the seller marks it overdue.
- Other payment conditions (if any). This will include any additional fees or penalties if payments are sent past the specified due date.
Invoice Payment Terms Examples
Here are some examples of invoice payment terms abbreviations that typically appear in a billing or an invoice statement:
- 2% 10 Net 30. This means that the customer is qualified for a 2% discount if they send payment within 10 days. Full payment is expected by the seller after 10 days, but the final due date for the payment is 30 days from invoice date.
- 21 MFI. The payment is due on the 21st of the month following the invoice date.
- Accumulation discounts. These typically appear when a customer exceeds a specific number of items in their order, making them eligible for a discounted price.
- CIA (cash in advance). The customer fulfills the payment before the goods or services are shipped or received. CIA can usually be done through credit card payments or wire transfer.
- CND(Cash next delivery). This detail appears when items are delivered regularly. It may be monthly or even weekly, and the customer must complete their payments before the next delivery is processed.
- COD (Cash on delivery). The customer pays for the item or goods upon delivery in cash.
- Contra. This refers to a type of transaction where two businesses or companies agree to exchange services or goods that are of equal value. The payment is in the form of the goods exchanged.
- CWO(Cash with order). Cash with order means the payment is made at the same time that the order is made.
- EOM(end of month). The payment is due at the end of the month when the invoice is issued.
- PIA (payment in advance). The customer must pay in full before the goods they ordered are delivered.
- Rebate. Also called a refund or pay back, rebates are sent to the buyer if they send payments in excess.
- Stage payments. It refers to a set of payments or installments agreed upon by both the seller and the customer that the latter must settle over a period of time.
Payment Methods on an Invoice
There are different types of payment methods that you can include in your invoice terms.
- Immediate payment. Also called payment due upon receipt, cash on delivery, or payable upon receipt. This type of payment is fulfilled upon the delivery of services or goods.
- Prepayment. In this case, the customer must send payment in advance for the services and items they want to purchase. Sellers can offer a discounted rate for the prepayment.
- 50% Upfront. Otherwise known as a downpayment, 50% upfront expects customers to pay half of the total cost. It is mostly applicable to customized goods and services.
- Installment. This payment method consists of partial payment plans that help make payments more manageable for customers. Here, the total cost of the item is divided into smaller payments.
- Lines of credit. Under this payment method, customers are offered credit for the services and products they purchase. The accumulated credit or balance is then repaid on an agreed payment schedule. Line of credit is a high-risk payment method and is most commonly used by large corporations.
- Subscriptions or retainers. These are regular or recurring payments fulfilled by customers either monthly or annually. Spotify, Netflix, and Amazon Prime are common examples of services paid on subscription basis, while retainers are used in legal services, consulting firms, and specialized services such as marketing and design.
Benefits of Detailed Invoice Payment Terms
In the section below, we’ll talk about some of the benefits of having detailed invoice payment terms.
#1. Less Ambiguity
Payment discrepancies are not always the fault of the customers. For example, an invoice that contains ambiguous and incomplete information could cause miscommunication between the seller and the customer.
For instance, the invoice may not have clearly stated the payment due date or the accepted payment methods, or it may have inaccurately described the payment terms agreed upon by both parties.
So, always double-check that you enumerate complete and accurate information in all your invoice terms at all times.
#2. Get Paid Faster
Whether you accept installment or subscription-based payments, going for the shortest possible payment term is always ideal.
Giving customers too much leeway regarding their payment obligations often leads to higher instances of late payments. Whereas, if you set the payment deadline to seven or 15 days from the invoice date, you have a higher chance of receiving full payment earlier.
It is also worth noting that the longer the payment is due, the more customers tend to forget or disregard their financial obligations to your business.
#3. Better Cash Flow Control
Complete invoice payment terms secure consistent and improved cash flow control. When you describe in full detail the total amount due, when the payments must be made, and on what terms, you reduce any room for error for your customers.
All that’s needed is for the buyer or customer to fulfill the expected payment based on the terms and methods stated in the invoice. By consistently issuing detailed invoice terms, you establish a concrete system that secures your business against potential losses and stalled revenue.
#4. Seller Protection
It is unfortunate that scams are rampant these days, and businesses, regardless of size, are not exempted from being targeted by fraud. You need a form of leverage to protect your business in the event of any disputes.
For instance, a customer with an overdue payment might argue that you did not specify when the payment is due. However, if you have clearly stated a deadline in your payment terms, the claim will likely backfire against the customer, clearing you from any potential liabilities.
#5. Follow-up Payments
It is easier to send follow-up notices to customers, especially if the payment deadline is near. At the same time, you can use your invoice payment term to track any habitual late payers among your customers.
Consequently, you can set up an email or push notification in advance to remind customers to send their payments and reiterate accepted payment methods to help ease the process for them.
Invoice Payment Terms Best Practices
Now that you are familiar with invoice payment terms and their benefits, let’s give you some tips on how to prepare them!
#1. Set Concrete Deadlines
Specify the deadlines for customer payments. It is not enough to state that payments are due “30 days from invoice date,” as this could easily be misinterpreted.
Supplement the information with a concrete deadline. Ensure that this key piece of information is indicated clearly and legibly in the invoice.
#2. Introduce Late Fees
One of the main reasons why habitual late payers do not seem to care that they have overdue payments is the lack of clear consequences for their delinquent accounts.
Introducing late fees sets a clear limitation that customers must acknowledge to reduce instances of overdue payments. Most customers would not want to shoulder the additional costs that result from sending payments past the deadline.
#3. Use Online Invoice Generators
If you are handling multiple orders and making invoices on your own, it is inevitable to commit a few errors in your invoice terms.
That’s where online invoice generators come in! They automate the invoicing process for you. Generators are easy-to-use, don’t take as much time as programs such as Word or Excel, and they’ll provide you with flawless invoices!
#4. Allow Multiple Payment Options
Don’t limit your customer’s options to a single payment method. Instead, offer alternatives to highlight customer convenience.
Customers appreciate it when sellers offer more than one payment option, as this enables them to settle their payments faster and more easily.
#5. Provide a Discount For Early Payment
If there are consequences for overdue payments, then it is also fitting to offer rewards in the form of discounts for customers who can settle their payments early.
Rewarding customers for early payments reinforces this type of behavior from your customers. Discounted prices are also an effective way to build rapport with your customers and entice them to explore your services and products.
#6. Discuss Payment Terms
Discussing the payment terms before sending the invoice is more plausible for consulting and legal services. That is because some arrangements and conditions need to be thoroughly explained to the client first.
Explain your payment expectations from the clients. Provide additional information on their payment options, along with the coverage of the services that they are paying for.
#7. Bill Your Goods and Services to the Correct Individual
Your invoice must be billed to the person who pays for the goods or services. Doing so makes it easier to follow up on payments in the future.
It will also reduce misunderstandings on the part of the customer. Moreover, it prevents scammers from attempting to use the personal information of unsuspecting victims and keeps delinquent customers from evading their financial obligations.
How to Make a Perfect Invoice Like a Professional
Invoice payment terms are more effective if you know how to create invoices like a pro.
A proper invoice should contain your business and customer contact information, a unique number, a breakdown of the goods or services, the corresponding price, and the payment terms.
You can use our invoice generator to make things a lot easier and faster. If you are catering to multiple orders, an online invoice generator allows you to keep up with your customers and keep everything systematic and in check.
It takes three easy steps to use it:
- Open our free invoice generator
- Fill out the form with the necessary details
- Preview and download your invoice
Flawless invoice payment terms are a must if you want to keep your business secure from scams and financial loss.
You provide customers with payment terms that adhere to their needs with the expectation that they will duly comply based on your mutual agreement. In turn, your customer expects you to deliver the goods and services that they paid for in excellent condition.
So, use our online invoice generator to reduce errors in your billing statements and ensure you keep track of all customer orders and payments without fail!
- Invoice payment terms are agreements and conditions between a seller and buyer. They break down accepted payment methods, price of goods and services, etc.
- Detailed invoice payment terms prevent misunderstandings, encourage faster payments, protect your rights as a seller, and enable continuous cash flow.
- When making payment terms, you should introduce late fees, offer discounts for early payments, allow multiple payment options, etc.
- The best way to make an invoice with flawless terms is to use an online invoice generator.
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