Invoicing and invoice terms are an art form, and it’s one you can’t afford to get wrong. As a small business owner, I’ve been through several iterations of invoice formats and terms over the years, iteratively tweaking the language to ensure my clients can process them quickly and pay me on time.
It’s a worthwhile exercise because that single piece of paper can have a big impact on cash flow.
Have you studied the terms of your invoices recently? Are they working for or against you? As this Fundbox infographic shows, 64% of small businesses are affected by late payments, and nearly half of all Net 30 invoices are paid late. If one in two invoices aren’t paid on time, then clearly those terms aren’t working for a large percentage of us.
Below are some tips and best practices for nailing your invoice terms so that you stand a better chance of getting paid on time.
1. Avoid the “One Size Fits All” Approach
Most invoices stick to the convention of Net X payment terms (Net 15, 30, 45, or even 60). That’s fine, but it’s important to bear a number of factors in mind before you slap “Net 30” on your next invoice:
What payment terms did you agree in your contract? If you agreed to Net 30, then your invoice should reflect that. Refer back and be consistent. However, it’s in your best interest to negotiate the terms you want before you do any work. For example, if you’re working on a large project that you know will take time to deliver, push for milestone payments or twice-monthly billing.
What industry do you operate in? What is the norm? If you provide custom goods, the client will need time to receive them, check their quality, etc., and then process the invoice, so Net 30 is probably fine. On the other end of the spectrum you have freelancers: designers, photographers, or writers. They provide a piece of work and, in most cases, the client reviews and approves it quickly. There’s no reason why the invoice can’t be processed right away (especially if you accept PayPal payments). In these scenarios, Net 15- or Net 7-day payment terms are more acceptable and easier to negotiate.
2. Steer Clear of “Payment Due Upon Receipt”
Accept that this is totally unrealistic and vague. Do you mean payment is due as soon as your client contact receives your invoice or when it crosses the desk of an accounts payable clerk? Who’s to know? Let’s face it, no client can turn around approvals or cut a check on-demand.
Asking for payment immediately can seem like the right way to expedite getting paid, but you stand a much better chance if you are specific about your payment expectations.
3. Tighten Up Your Net X Invoice Terms
If you want to get paid in 30 days, tighten up your terms to Net 13. A survey by Xero found that regardless of whether your payment terms are due immediately or due in 30 days, invoices—on average—are paid two weeks late. If you expect to get paid in 30 days or less, Xero recommends that you make your payment terms 13 days or less.
4. Add Late Payment Fees
If you’re perpetually falling victim to late-paying clients, consider adding late payment fees to your invoice terms. This could stir up a hornet’s nest, so tread carefully. A client may push back, which gives you an opportunity to reiterate your Net X terms. If there are genuine reasons for late payment or they commit to prompt payment moving forward, consider refunding that charge or deducting it from your next invoice.
The Fundbox blog has covered a lot of tips for getting paid on time, everything from billing as soon as you complete the job (rather than waiting till the end of the month) to giving clients the option of electronic payment. For more tips for avoiding overdue invoices, read this: Is the Way You Invoice Helping or Hurting Cash Flow?