What Are the Best Invoice Payment Terms for Your Small Business?

Cody Cromwell
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Typical Invoice Terms by Industry

There are basically two ways to handle your invoices: 1. Invoice must be paid within a specific period of time or 2. Invoice can be paid at the customer’s convenience.

Most banks will accept invoices where payment is due within 30 days. However, this option can be available to your customer only if you are unsure if the payment can be made within a 30-day period.

Reloadable / Recurring Billing / Automatic Invoice Discounts

Almost all banks have some sort of recurring/automatic bill payment option for your customers, meaning that if you set up a recurring payment on your "charge", you can ask your customer for a monthly commitment and you will be automatically billed every month based on the rate of your choice.

It is important to note that the amount billed to your customer will likely take away some of your revenue, but it will give your customer the comfort of having a "monthly" payment to pay.

If your customer delays payment, you'll receive a late payment fee.

So, the answer to your question is: they are all billed the same. Over the course of having multiple accounts, I have seen some policies shifted around by a firm, but these are the general guidelines for large financial firms.

Payment Terms Examples: Three Types of Small Businesses

Many small business owners are confused about the variety of small business invoice payment terms options and how they’re working with their bank.

In order to break down this mystique, I’ve created a comparison of the different types of small businesses that can be used to explain the best payment terms options for each. Once you compare the three options outlined in the three examples below, you’ll be better equipped to start figuring out your small business invoice payment terms.

Things To Keep In Mind When Choosing Your Invoice Payment Terms

The invoices you send out can have a significant impact on the bottom line of your small business, and choosing the appropriate invoice terms can have a big impact on your cash flow.

Many small business owners know that it’s important to get paid early and on time. But there are other important factors that you’ll need to consider in order to achieve the best terms possible for your invoices.

Even the most reputable of small businesses will have an occasional problem with an invoiced client. However, it’s important to learn how to handle these situations in order to protect your cash flow and maintain your good business reputation.

You should also take note of how your invoices are paid, since the way that they’re paid can have a significant effect on your bottom line. Different kinds of payment terms can greatly affect your cash flow by providing you with both early payments and discounts.

In this post, we’ll take a closer look at various invoice payment terms and how they can help your small business.

Client’s History

The first thing that you can do is to look at the customer’s history. Is this a long-term customer? If so, does he or she always pay on time?

If they not always pay on time, can you persuade them to pay early? In all our experience, we have found that customers hate having late payments on their accounts. If you can set up some type of incentive program with your client so that they start paying on time, you can often get them to pay early. We’re not suggesting that you start doing collections or anything like that – but an incentive can be something like a discount or a hold to their next order.

If the client has never been late, there may be some other problem that has caused you to send the payment reminder. Is the client using a collection agency to collect payments? Are they chronically late with invoices? These are all reasons to send a reminder.

Size of the Invoice

50% Payment Within

Only 3% of small businesses demand a larger downpayment from customers.

In fact, as shown in the chart below, three months of free check and automatic debit payments are almost standard for a small business. These payment terms give a small business owner and their company a lot of flexibility to manage their business finances.

This statistic really says a lot about how today’s small business owners really are responsible with their business finances. When you have to plan a fiscal calendar that involves two-to-four month anticipation planning for purchases, you’re asking a lot of your business to perform.

Given the small percentage of small businesses that require only a 50% deposit, it’s understandable that the majority of businesses reach for the lower downpayment. Although a 50% downpayment may seem like a lot of money to some business owners, it provides a lot of flexibility for the company to succeed.

Fortunately, increasing the deposit by just one percent increases the number of businesses by more than 10%. This increase shows just how powerful the 50% downpayment is for small businesses looking to build shareholder value.

Late Fees & Interest

A customer can afford to make your business wait for a payment, but they will pay you back for it in the end. That was the old model – make your customers wait long enough to pay you back. However, that is a terrible business model.

Your profit margin is going down if you insist on late fees, interest charges, and/or collection fees. While those charges do float some businesses, many places no longer are able to institute them. An increasing number of sellers are simply not able to make anything out of the way the transaction is structured.

Currently, the U.S. Congress is debating whether or not we should end the 2001 Authorization for the Use of Military Force (AUMF). A group called the United States Committee Against Anti-Asian Discrimination (USCAAAD) is pushing a bill that would limit the use of these types of fees to a pre-approved list of qualified businesses.

How to Use Invoice Terms to Bring in Money Sooner

When a company bills you for a product or service, you might think there’s nothing extra that they can do to pump up that payment. However, by giving your customer the opportunity to make a small payment, you can increase your cash flow on a recurring basis.

Many small businesses fail to take advantage of the flexibility payment terms offer to bring in payments sooner. On an invoice, you can usually request that your customers set up a card payment. This may also include when your customer can make the payment and any other options you add. By providing these payment terms, your customer will be given the choice to pay in cash, by check, or by submitting a credit card payment. Making a card payment allows you to receive payment as soon as it’s processed.

The type of payment terms you offer a customer will depend on the type of product you sell and who it’s being sold to. Not all companies should offer payment terms, and you should even use caution when taking a customer’s card information over the phone. In addition to verifying the card’s expiration date and CVV number, you should know the amount of the payment before the customer submits the card information.

Early Payment Discounts

(EPD)

There’s nothing better than a discount on the nose. While discounting your invoice is a standard sales practice, your small business can take it a step further. By offering an Early Payment Discount (EPD), your small business can effectively compete with larger businesses.

First, let’s discuss why this can be effective for your small business. Every month’s revenue, whether it’s a credit card payment, a utility, or an invoice, is a monthly installment. Any small business that’s well-organized, managed, and develops its own vendor relations understands and fully understands the fundamental tenant that every business receives monthly payments.

The discount you can offer is your small business’s version of a payment installment. While you’re not necessarily offering a payment discount, you’re offering your small business’s service at a discount that would otherwise be charged to the vendor on an expedited basis.

Offering a discount on your invoice advances payment of your small business’s monthly installments or payment of invoices, which saves you time and your vendors money by reducing the total cost of good and service delivery.

Invoice Factoring & AR Financing

A invoice factoring is not in reality a business finance anymore but more of a business finance product. Invoice financing is a common practice used by almost every business in their day to day operations and most of them do not even know about the factoring of the invoices they receive or how they can be financed.

A invoice factoring together with an invoice finance company has been always been a powerful financial platform for small businesses to expand and grow.

Factoring inventory is the most common process in place for potential small business for their business is getting started where the money from the factoring can be used to finance the business inventory and start the business.

A invoice factoring can be used as the best business finance product for small businesses when they have already some credit history and the finances are restricted for the business expansion. There are some financial finance products such as invoice factoring, invoice discounting, invoice finance, invoice credit, invoice payment and invoice discount which provides their own business financing technique and are extremely useful to a small business that operates in a competitive market where they have a huge monetary requirement.

Why Invoice Terms Matter

When suppliers and clients communicate on invoice terms, they are indicating the manner in which they expect you to pay. These terms can include:

When

At what time you must pay the vendor.

Quickly

How quickly you must pay the vendor after you receive the invoice. This period may be shorter if you’re a smaller business or if the supplier is a speciality supplier to your business (i.e., you’re not in a rush to pay as a general rule).

On Net

How you’re going to pay the vendor. If you constantly pay the supplier after you receive the invoice, the terms become especially important.

Net

How you’re going to pay the vendor (i.e. how much you’re going to pay).

Once or Twice a Month

How often you’re going to pay the vendor.

Exactly

How you pay the vendor.

Dollar Amount Due

What is your payment to the vendor?

Do you need to explain payment terms?

How does it work?

What should my payment method be?

Do you want me to send you the net amount due, and you’ll send me the rest?

Frequently Asked Questions (FAQs) About Invoice Terms

Invoice terms and invoice payment terms are a means of ensuring that a payments – typically bills – from a business to its supplier are paid on time. But what exactly is an invoice term, how does your invoice term affect your business and how do you calculate your invoice terms and payment terms?

In short, invoice terms and payment terms are the terms of your invoices.

Invoice terms can be specified on:

{1}. Invoice Amount: a method of calculation where the invoice is calculated based on the amount of goods or services provided.
{2}. Invoice Currency: a method of calculation where the invoice is calculated based on the currency used for the transaction.
{3}. Invoice Timing: the due date or payment date of your invoice.
{4}. Invoice Payment Terms: the terms for settling your invoice.

One important consideration when establishing your invoices is the timing of invoices. Early payments are a good indicator that an invoice will be paid on time. This allows you to plan your expenses accordingly.

The most common invoice terms are 30 days, 60 days and 90 days. You may also scale your invoice terms higher or lower based on your own business needs, such as for a busy season or a slow season.

What are the terms of payment?

You’ll need to take a close look at your customers to see what their payment practices are. It’s very important to make sure that your customers have a way to pay you as soon as they want to because it can give you an idea of the creditworthiness of your customers.

While the invoice term you select will depend on your business, better for you to have a look at the frequency of payment. You’ll want to start out with the shorter terms and then increase credit in advance of a busy season. This will allow your customers you to pay you more often and make sure that you’ll receive the money and that you’ll be even more prepared for your busiest time.

There are several ways to lower payment terms. Often times, it may start with accepting credit cards for your goods or services. If you’re an accountant, you can encourage your customers to send you payment upfront rather than wait for an invoice to be delivered to them.

When should an invoice be due?

Generally, invoices are due 35 days after your customer accepts or rejects the terms of the invoice. The rule of thumb is that invoices are due on the first of every month following the date they’re issued.

If a due date falls on a weekend or holiday, the invoice is considered late the following business day. If a due date is past midnight, the invoice is considered late as of the following business day.

What are the most common invoice terms?

Every small business owner knows that invoicing is a necessary evil – a marker of time, accomplishment, and progress. But when your customer is slow to pay you for the products or services you’ve provided, calling them and nagging them to pay up can feel like a lost cause.

Instead of getting frustrated, consider offering a different payment plan. Invoice terms like Net 30, Net 60, and Net 90 make it possible for your customer to pay you for the products or services you’ve provided immediately, and they also give you more flexibility in the amount of time you need to wait to be paid.

So, what’s your best invoice payment terms? After listing a couple of other traditional terms, we asked real small business owners to choose the terms they most commonly offered.

The chart and write-up below show the invoicing terms that they use the most. But you can also see that they’ve offered a couple of other terms, too. The options they chose aren’t necessarily the best for your business, but it’s good to know that they’re offered. And of course, if you’re interested, you can use these invoicing terms for your own business.

Bottom Line

Whether your small business is selling your products or services, invoicing your customers is important. Especially as your company grows and you need to track how much you are receiving and spending. But with the explosion of available software options available on the market today, not all invoices can be the same. The best invoice payment terms must fit your business, as well as meet your own company’s requirements and preferences.

There are many factors that can affect your best invoice payment terms. Some are easy to change, while others may change the way you invoice your customers.

Here’s a look at some of the more common ones:

Invoicing frequency. This has a lot to do with the type of business that you own, as well as how often your customers purchase from you. Companies with high production requirements or small businesses with fluctuating sales may need to invoice customers more frequently to keep up with their cash flow. However, if your customers all buy one-time items and only have to purchase them occasionally, you may not be able to offer the same invoicing options.