- Receiving payments on time is important for any small business owner.
- By establishing the appropriate payment terms with your customers, you will avoid overdue invoices, poor cash flow and financial difficulties.
- Your understanding of common accounting payment terms and strategies can optimize your ability to receive fees in a timely manner.
- This article is for small business owners who want to use better accounting practices to receive payments on time.
When you’re a small business owner, getting paid on time is a top priority. If you don’t set the right payment terms with your customers, it can lead to late payments, poor cash flow, and unnecessary stress in your business. =
Fortunately, there are simple steps you can take to improve your billing practices. This article will look at 15 common accounting payment terms and how to use them in your business.
What are the payment terms?
When you send an invoice to your customers, the payment terms set expectations for future payment. They let your customers know how you prefer to be paid and when they should pay you.
Payment terms will also sometimes include penalties for late or missed payment. It’s important to have transparent payment terms in place, so your customers know what to expect. The simpler these are, the easier it will be for your customers to pay you on time.
What do the invoice payment terms include?
When you send a new invoice to a customer, it should include all the information they need to pay you accurately and on time. Here is an overview of the information you should include.
- The billing date: This is the date on which you send the invoice.
- The due date: The due date is the date you expect to receive payment on the invoice – many invoices include standard payment terms such as Net 14 or Net 30. (You’ll learn more about these terms below .)
- The invoice number: The invoice number allows your customers to keep track of all the invoices you send them.
- How much is the bill: The invoice should clearly show the amount the customer owes you.
- The currency in which you wish to be paid: If you frequently work with international clients, you can specify the currency in which you want to be paid.
- The payment methods you accept: The invoice must include a list of acceptable payment methods. For example, you can accept credit cards, online payments, and ACH payments.
- Other payment terms: Your invoice should include any other payment terms the customer should be aware of. For example, you may want to include discounts for early payment or if you expect an initial deposit.
Common Payment Terms
Payment terms are usually included on an invoice as an abbreviation. Here are some of the most common bill payment terms you should be aware of.
- 1MD: This is a payment credit for a full month’s supply.
- AIP: It stands for “payment in advance”, which means that payment must be made in full before the goods or services are delivered.
- CIA: It stands for “payment in advance”, which means that full payment must be made in cash before the goods or services are delivered.
- Upon receipt: Payment is expected upon receipt of the invoice by the customer.
- Network 7: Payment is due in seven days.
- Network 21: Payment is due in 21 days.
- Net 30: Payment is due in 30 days. You will also sometimes see Net 60, Net 90, etc.
- EOM: Payment is due at the end of the month in which the invoice was received.
- 15 MFIs: Payment is due on the 15th of the month following the invoice date.
- 2/10 Net 30: Payment is due within 30 days, but customer may qualify for a 2% discount for payment within 10 days.
- COD: It stands for “cash on delivery”, which means that the goods or services must be paid for in cash at the time of delivery.
- NDT: It stands for “cash next delivery”, which means that payment must be made before the next delivery. This payment period is generally reserved for recurring deliveries.
- SCS: It stands for “pre-shipment payment”, which means that the balance must be paid before the product is shipped to the customer.
- CWO: It stands for “cash on order”, which means that the customer must pay the full invoice before the goods are produced and dispatched.
- Cumulative discount: This is a discount given on a large order.
Importance of payment terms
Your small business’s cash flow depends on how quickly your customers pay you. Having clearly defined payment terms will make it easier to forecast cash flow, support new projects, and invest in new opportunities.
If you’re too lax on payment terms or don’t follow up on customers with outstanding balances, your business’s cash flow could suffer, leading 82% of small businesses to bankruptcy, according to a study of the American Bank.
How to use payment terms
You can use payment terms to control how and when your customers pay you. These terms set out payment expectations upfront, so you don’t have any confusion down the road.
Here are some tips for using payment terms to your advantage:
- Ask for an initial payment. In some cases, you may want to request payment up front. This can be a good choice for service providers who want to guarantee payment before starting work.
- Request a deposit. If requiring an upfront payment is unrealistic, consider asking for a down payment. For example, asking for a 50% down payment is a good option for larger projects.
- Create monthly installments. If you have clients you work with on an ongoing basis, you can set up a monthly retainer for them. This is a fixed payment amount that you accept each month.
- Set billing terms. If you occasionally work for clients, you will need to decide on billing terms. For example, you can set billing terms to be due upon receipt, or you can choose payment terms as long as Net 90. It all depends on what makes sense to you and your customer.
How to set up effective payment terms
If you’re struggling to get your customers to pay their bills on time, you may need to implement more efficient payment terms. Here are seven tips for setting up better payment terms for your customers.
1. Use accounting software.
First, you can simplify your invoicing process and finances if you use accounting software. The right accounting software will allow you to send invoices faster and with fewer errors.
Plus, you’ll be able to track your upcoming payments, send automated overdue payment reminders, and easily reconcile your account. And accounting software will make sure your financial records stay organized and you’re ready for tax season.
Point: Are you interested in trying accounting software, but overwhelmed by all the available options? Check out our guide to the best accounting software 2022 for small businesses or details on specific products, like our QuickBooks Online review.
2. Be upfront about your payment terms.
Before you start working with a new client, make sure they understand and agree to your payment terms. Explain the terms verbally to your client and include a written description in the contract you send. This will help eliminate any misunderstandings about how much customers owe you and when payment is due.
3. Be polite.
Want an easy hack to get your customers to pay you faster? Be polite when billing your customers and include the words “please” and “thank you” somewhere on the bill.
A FreshBooks study found that invoices that include a “thank you” in the invoice terms are paid nearly 90% faster. And 45% of those invoices are paid in seven days or less, while 12% are paid in 14 days or less. Using “please” has a similar result; these invoices are paid 88% faster.
4. Offer a variety of payment methods.
Have you ever tried to make a purchase at a store and discovered that the business only accepts cash? Think about how you felt when you realized this – were you frustrated and annoyed by the inconvenience?
That’s probably how your customers feel if you offer them limited payment options. If you want them to pay on time, make it as easy as possible for them. Offer various payment methods such as credit cards, debit cards, online payments, ACH or even cryptocurrency payments.
5. Set shorter payment terms.
One of the best ways to get your customers to pay sooner is to shorten the due date. It sounds obvious, but if you give your customers plenty of time to pay, they’ll usually take it.
For many industries, Net 30 is considered the gold standard for payment terms. This is a good time frame, but if you have a client who regularly skips your Net 30 due date, you may want to consider shortening it to Net 21 or Net 14.
6. Be flexible.
Obviously, you want your customers to pay you on time, but you want to recognize that sometimes you’re working with another company, and that company may be struggling with its own cash flow issues. Some businesses simply cannot accept Net 14 or even Net 30 payment terms and will appreciate more flexible terms.
Point: If you have a client who regularly pays late, talk to them to find out what the blockage is without putting unnecessary pressure on them. Try to find payment terms that work for everyone.
7. Offer a prepayment discount.
Consider offering a prepayment discount to your customers. For example, your standard terms might be Net 30, but customers get a 2% discount if they pay the invoice within seven days.
So if you send your customer an invoice for $5,000, they will receive a $100 rebate for paying the invoice early. These discounts add up over time, so many customers can take advantage of them.
Of course, this type of discount means that you will accept less money on the bill. But the improved cash flow can be worth it for your business.