The importance of invoice payment terms

The importance of invoice payment terms

With the right payment terms in place, getting paid promptly, or indeed on time, can fast become a reality, and it’s all down to your invoicing. 

The invoice you send to your customer and the information it contains cannot be underestimated. 

However, for many businesses, an invoice template and the wording on the invoice is not something that is reviewed as often as it should be. Checking to make sure all of the information is still relevant and that what you are asking of your customer, i.e., payment, suits your business requirements. 

Invoices form a big part of your communication process; hence testing different types, formats, and wording is key, helping you to avoid invoices becoming unpaid invoices and affecting your cash flow. 

This post looks at the key invoicing elements to focus on, creating an invoice that increases your chances of getting paid on time, every time. 

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Invoice payment terms 

Outstanding and overdue invoices are the biggest challenges for many small and medium-sized businesses, with your invoice payment terms having the power to affect how quickly your customers pay you. 

Invoice payment terms is the information included at the bottom of an invoice that outlines when you expect payment, if there are any charges for late payment, and what payment methods are accepted. 

Payment terms provide you with control. Control over your cash flow and credit control processes. Forming part of the terms and conditions for invoice, your payment terms should work for you and be realistic for your customers. 

Invoice payment terms help you: 

Retain control – with the right invoice terms and conditions; you inform your customers when you want to be paid. Forming a contract between you and your customer, you can use this information to protect and support both parties, build long-term relationships with your customers, and have a greater understanding of processes and procedures. 

Control how you get paid – how do you want your customers to pay you for the goods and services you provide? Outline methods of payment clearly, offering as many options as is viable. 

Make payment terms part of your contract – outlining agreed payment terms in your client contract and summarising these on your invoice can be essential, as placing this piece of information within both provide you with a stronger legal standing. 

Invoice elements to review 

Language – make sure you use clear and concise language in all forms of communication. Avoid using internal abbreviations, colloquialisms, and finance jargon that customers often misinterpret and misunderstand. 

It’s also wise to spell out acronyms such as: 

  • EOM – end of month 
  • COD – cash on delivery 
  • CBS – cash before shipment 
  • PIA – payment in advance 

We also find that using wording such as “payment due within 21 days” is much more effective than “net 30”, again avoiding jargon and boosting your chances of getting paid faster. 

Payment terms in this sense must be kept as straightforward as possible while always bearing in mind when you want to be paid.   

Another example is the wording, “upon receipt.” This phrasing is often misinterpreted and is the main result of overdue invoices.  

This is because “upon receipt” can be upon receipt of goods or upon receipt of the invoice, hence causing disputes between parties if each believes their view to be correct. 

We have also found that invoices that were paid faster-included terminology asking for payment in 7 days and a penalty notice that interest and late payment fees will be charged when invoices become overdue. However, if payment was not received in 7 days, research showed that it was made within a 30 day period. 

Terms – making small changes to your payment terms now can have a big impact in the long run. For example, could now be the perfect time to test different payment lengths, i.e., before a specific date, or before the end of the month, etc.? 

We’d also recommend that you don’t give clients additional time to pay because, trust us, they’ll take it.  

In contrast, asking for payment sooner is proven to get you paid sooner. 

You can also look at your policy on charging late payment and interest fees, setting out clear penalty notices that can avoid late payments, and help deal with any issues arising with late payment.  

However, avoid making these penalties sound like a threat, but rather a chance to show your professionalism. 

Tone – your invoice should be polite and professional. It is an important piece of communication, and the information included should be relevant and detailed. Talking through your payment terms with your customer beforehand is also beneficial and avoids any surprises when contracts and invoices are issued. 

It’s also important to note that invoices that include the words “please” and “thank you” will increase your chances of being paid sooner. 

Our quick-fire recommendations: 

  • Keep payment terms short and to the point 
  • Include please and thank you 
  • Be realistic with your terms 
  • Include late fees and interest charge notices. 

Are your invoices and payment terms hitting the right mark? Do you know when you have money coming in and through what payment method? 

Call 0330 229 1991 or email Direct Route today to help you take control of your cash flow.

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