Making Payment Terms Work For You
Using the right invoice payment terms can make sending invoices and receiving payment easier and faster. Here are a few tips and tricks to help the process.
Get paid fast with the right payment terms
As an entrepreneur, getting paid is one of the most exciting and frightening parts of the process. You can’t wait to literally get paid for doing what you love—but you’re feeling a little uneasy about asking people to give you money. Especially when they’re a few days late paying up.
You’re not alone. Xero says that invoices are paid late almost half the time, and Inc. says that 16 per cent of invoices will never be paid at all. Luckily, the law is on your side and having the right payment terms on your invoice can help give you the backing you need to get paid quickly and on time.
You deserve to get paid for all of the hard work you do. It’s time to arm yourself with the right information to make that happen.
What are payment terms?
Payment terms are simply the conditions that need to be met when you, as the vendor, complete a sale. They outline when you expect payment, any conditions that exist on the payment (like late fees or early discounts), and any discounts that you’re giving the purchaser.
If you’re selling someone a candle from your physical location, chances are they’ll make payment and walk out of the store with their new item. In this case, you’re using immediate payment. But as a freelance writer, you might deliver a blog post to a client then issue an invoice due in 30 days—this is a Net 30 payment terms clause.
Any time you make a sale or purchase a product or service, there are conditions attached to that deal. And, as an entrepreneur, they can help you collect payment from your customers without feeling bad about it.
Common payment terminology
Invoices are only as good as the payment terms that come along with them. If you don’t include them, you aren’t clearly communicating what you expect. That means everything from when payment needs to be made to how it’s done and the consequences for non-payment are up in the air.
|Terms of sale||The overall payment terms that you and the purchaser have agreed on. These include the cost, amount, payment method, delivery, and due date.|
|Immediate payment||Sometimes referred to as “cash on delivery” or “payable upon receipt,” this means that payment is due upon receipt of the product or service. Think of immediate payment as purchasing a candy bar from the gas station around the corner; it’s an immediate exchange of goods and services.|
|Payment in advance||When payment is made prior to the product delivery, payment in advance ensures that there is no risk of not being paid for your product or service. If you make a purchase off Amazon, you pay in advance then they package and deliver your product.|
|Net 7, 10, 30, 60, 90||Invoice net terms are a fancy way of saying how many days a payment is due. Net 30 terms mean it is due 30 days from the date of the invoice; likewise, Net 7 means payment is due in seven days.|
|2/10 Net 30||A more complex way of saying that you expect payment 30 days after the invoice date, but if your client pays within ten days they save two per cent of the bill. It’s a great option for incentivizing clients to pay early.|
|Line of credit pay||When someone pays for something over a period of time but gets the product or service immediately, like making monthly or quarterly payments. Line of credit payment is not often seen in small businesses because of the increased risk of not being paid and the decrease in cash flow.|
|Recurring invoice||Used for services that occur on a monthly basis. A marketing consultant might charge a flat rate each month for an agreed upon regular delivery of a service. These are great for predicting cash flow and saves you from having to make a fresh new invoice each month.|
|Quote or estimate||A ballpark or calculated guess at what your goods or services will cost. Most often used as a comparison or bid for a project, this isn’t the final number you’ll bill, but it outlines not only the schedule of work but also an itemized breakdown of what will be done to complete a job.|
|Interest invoice||When you charge a late fee on your invoice. Late fees are calculated based on the number of days the invoice is late—most invoicing software lets you add a late fee onto your invoices.|
|Invoice factoring||When you hand over unpaid invoices to a third-party, and you receive 85 per cent of the payment upfront. These companies charge a fee for their services.|
7 tips for getting paid faster
Having great payment terms is only half the process. You need to know how to use them to your advantage to get the full effect. Getting paid faster is the dream that you have the possibility of actually making a reality, and there are a few things you can do to increase your chances of making it happen.
1. Discuss terms before starting the work
It’s best practice to include any terms and conditions for payment in the initial contract you sign with clients. This helps ensure that everyone is on the same page and your clients understand what you expect from them with regards to payment.
You do good work, and you deserve to be well-compensated for it, so don’t be afraid to talk about it upfront (you’ll thank yourself later).
2. Opt for quicker payment terms
Xero did a study of a million invoices that went through their program and came up with some interesting insights:
- Net 7 terms are typically paid within two weeks
- Net 14 terms are typically paid within two or three weeks
- Net 21 or Net 30 terms are typically paid within a month
It goes without saying, it pays to use quick terms. Plus, they’re becoming more popular, and it makes sense to collect as soon as (or shortly after) the work is done.
3. Don’t put invoicing off
Without good time management, your business is most likely going to be a mess. There is a lot of work that goes into invoicing, and it’s easy to push it to the next day. But sending out your invoices three days late is only hurting you. That means the deadline is three days later, and probably the payment too.
So, set a specific time—weekly or monthly—to submit your invoices, and make sure you also keep a detailed record of which invoices you sent when so you’re not scrambling to make sure Client X or Customer Y paid. Using accounting software can help immensely with this.
4. Make your payment options flexible
Having multiple payment options puts the choice in your clients’ hands. That means they can pay in a way that’s easy and comfortable to them, which can ultimately help them pay faster.
But don’t go overboard. Having too many payment options can not only be overwhelming to clients, but it can also make your administration that much more complicated.
If you have to reconcile payments from credit cards, direct deposits, PayPal, TransferWise, Stripe, and your invoicing programs internal payment system, you’re looking at a lot of extra paperwork. So, have flexible payment options but also pick your POS system carefully.
5. Display invoice terms prominently
While you’ve already talked about your terms upfront, it can help to speed the process along to also include them right on your invoice. That way, your client has the opportunity to see them any time they look at the invoice.
You want on-invoice terms to be as direct and understandable as possible. Some clear payment terms wording examples include:
- Please pay your invoice within 30 days
- Payment due immediately
- Invoice due upon receipt
6. Set up a payment collection strategy
Simply sending an invoice doesn’t necessarily mean you’re going to get paid. Invoices get lost and people procrastinate. So, if you want to make sure that your invoices are actually paid, you might have to put some extra work into it.
Set up an easy-to-run, automated system that can send reminders to your clients when invoices have not been paid. Most programs will already have standard versions of these built-in, but it helps if you add a little personality and personalization into their stock messages.
7. Incentivise on-time payments
You can use these terms to your advantage and incentivize on-time payments. Two great ways that you can encourage clients to pay on or before the due date include discounts and overdue fees.
A great example of a positive incentive is a 2/10 Net 30 payment terms contract. While payments are due in 30 days, clients are incentivized to pay within ten days because they save two percent of their bill.
If discounts aren’t your flavour, then late fees might do the trick. You can add a late fee (see “interest invoice” defined above) that can help incentivize clients to pay on time. But you do need to make sure that any late fees you have are in-line with Canadian law.
Make getting paid easier with accounting software
Accounting software is an easy way to start making your life as an entrepreneur smoother. Not only does it help you accurately track your invoices and expenses, but it can make it easier to track payment and follow up when it’s not made. There is a lot of great software out there; you just need to pick the one that’s right for you.
If you’re on a budget, Wave is a great choice because it costs nothing for you to use. However, there are pay-per-use fees on payment transactions, and you can add monthly payroll for an additional cost. They accept an array of payments and can pull your income from PayPal.
When it comes to payment terms, you can set the due date for the payment of your invoices and write in your terms and conditions at the bottom of the invoice. But Wave does not handle contracts, nor do they have automatic late fees.
Best for: those on a budget
Bonsai is ideal for freelancers that are just starting out. It’s affordable, and the extras included pack a good punch. It has the ability to create and send proposals and contracts, as well as track your time, set up recurring payments and send invoices.
With Bonsai, you can manually set your own due date on invoices. You can charge an automatic late fee, set-up reminders for your client (which you can send automatically or manually), and they handle contracts.
Best for: freelancers just starting out
Honeybook is a great choice if you’re looking for an all-out client management software. It can handle everything from sending a brochure to making payments. It also integrates directly with your bank account, so when a client pays, you get a direct deposit.
With Honeybook, you can set up recurring payments, send and sign contracts, and set up automatic reminders. But you aren’t able to tack on a late fee or an early payment discount.
Best for: complex projects or monthly retainers
Set yourself up for success to get paid on fast and on time
You deserve to get paid on time for the work you do, and having the right payment terms can help make that happen. They’re an important entrepreneurial tool that can be used to your advantage, and there’s no more perfect time than now to start implementing them!