A Brief Introduction To Payment Terms

A Brief Introduction To Payment Terms

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The most important thing for a business owner to do is to make sure that the payments that are owed to him are received as soon as possible so that he can cover his expenses and keep the business running. The owners of the business, self-employed people and those who are in charge of the company’s finances should know how to make invoices with clear and precise payment terms.

The knowledge of common payment terms and their proper usage in the invoicing process will help the clients to pay on time and in the right manner. The more you know about the payment terms, the better you will be able to select the right method for your business’s sales. 

Payment terms and invoicing are usually more important for businesses that provide services and those that sell goods at a high price. For instance, the strict payment terms in an invoice might be the best option for a lawn care company that provides services on a schedule, but that wouldn’t work for a coffee shop that sells directly to its customers.

Contract Payment Terms Explained

Payment terms refer to a deal between two parties who are going to make a business deal and will let you know how, why, and when you are to get paid from your customers or clients. Generally linked to invoice payments, clear contract payment terms can help to make your billing process more understandable, keeping customers informed about both on-time and delayed billing.

Importance of Payment Terms

The payment terms of a contract are significant factors that let you know the exact amount and the time when money will hit your account making accurate cash flow projections possible. Precise cash flow projections give you the opportunity to plan taxes, run your business smoothly, adopt business growth, and decide if you have received the payments in a timely manner.

How Payment Terms Work?

The payment terms are very important during the contract discussions. A well-thought-out payment terms should be in the interest of both parties because it will make sure that the clients will pay on time while at the same time the customers will be not disturbed. For a healthy business, it’s a must that your payment terms are in line with your business plans and the usual sales cycle of your industry. This correspondence keeps the cash flow, covers the expenses, and therefore the growth. At all times, the payment terms must be stated on the invoices to make it clear what to expect, to avoid any confusion and to ensure the smooth financial transactions. The payment terms should clearly state the date of the due, the acceptable methods of payment, and any penalties for the late payments in order to encourage the prompt payment and financial stability of your business.

When Are Payment Terms Created And How Are They Updated?

Payment terms should be set before sending out the invoice and they should be changed whenever the payment structure changes. At all times, the payment terms must be mentioned on the invoices to prevent the misunderstanding and disputes. The payment terms that are clear set the due date, the ways of payment that are accepted and any penalties for the late payments. This enables the clients to be aware of their responsibilities thus, you can always have a regular cash inflow which is very important for you to pay your expenses and keep your business running.

Types Of Payment Terms

Creating an invoicing system with specific conditions of payment is a crucial aspect that must not be missed while covering business accounting. Setting payment terms gives top priority to your payments and establishes expectations for your customers making the relationships with clients even more professional and efficient. Once you have gotten these payment terms, the next thing that you have to think about is using various ways of accepting the payment methods and these may include payment in advance or partial payments. 

Prepayment

Advance billing will help you to improve your cash flow as well as get your money and limit the chance of loss. For instance, a business providing event photography services may want to minimize the chance of cancellation by requesting full payment before the event. Prepayment can be a great advantage for businesses, so some companies incorporate discounts for customers who pay in advance.

Partial Payment

You can decide to demand only a partial payment of the customer’s total payment. Numerous times this may be the source that gives your business the working capital needed to finish a customer’s project or the benefit in the form of increased sales and higher order value for your business They could also help your customers in that they could break down the costs into smaller portions, which could be easier for them to manage.

Installment Agreements

You can also make installment payments. Certain corporations develop installment contracts according to time, say every three months or completion of project milestones. You may opt to split the customer’s total cost into a couple of smaller monthly payments. For vendors, services like Afterpay are now possible where customers can buy something and pay it off later over several months.

Lines of credit

A line of credit allows buyers to finance the products they need and pay back the balance on the agreed payment plan. The business line of credit can also pose a certain level of risk as it is possible for the customer to default. This approach is often used by large corporations but can be also used by small businesses.

Immediate Payment

Immediate payment means a transaction for which payment should be made as soon as the goods are received or as soon as services are provided. Some might put in the contract that you have the right to retrieve goods if the customer fails to pay on immediate payment. On the other hand, immediate payment is not always possible for every type of business or transaction.

Net 7, 10, 15, 30, 60, or 90

These terms say the number of days within which money should be paid. Another example would be net 60, which means that a customer should settle their account within 60 days of the date marked in their invoice statement.

This strategy of net payment terms may not be so convenient as you may have the project already done without the receipt of the income. Hence, customers may be even more accepting of these terms. You will have to accommodate a time that will suit both you and your client.

Subscriptions And Retainers

The subscription and retainer payment terms demand the clients to pay on a regular basis either monthly or annually. Generally, when a client had put a business on a retainer agreement, such businesses usually billed the clients at regular intervals. Utilizing invoicing automation for recurring payment management could be helpful in such situations.

Common Invoice Words And Acronyms

Here are some of the most common invoice terms that small business owners should know when creating invoices :

AbbreviationMeaning
CIACash in advance
CBSCash before shipment
CNDCash next delivery
CODCash on delivery
CWOCash with order
EOMEnd of month
PIAPayment in advance
1MD, 2MDMonthly credit payment of a full month (or two-month) supply
21 MFI21st of the month following invoice date

These are a few other terms you may see when you handle the company’s finances: 

  • Accumulation discounts: Discounts for large quantities.
  • Contra: Payments by clients after subtracting the purchased materials cost.
  • Forward dating: For invoicing to be paid after the customer obtains the order.
  • Partial payment discount: A slight trade discount is being given because of poor cash flow.
  • Rebate: Refund issued to the customer after they have completed their payment.
  • Stage payments: Make payments in installments, with an agreed period by the client and the seller.

Common Invoicing Challenges

The invoicing process isn’t as simple as it seems if we look at it thoroughly. In addition to payment problems, there can also be management problems. Some common invoicing challenges are: 

  • Resolving disagreement over payment terms 
  • Attempting to follow up later or unpaid payments
  • Keeping account of invoices and payments 
  • Handling of payments and accounting of the invoices.
  • Keeping payments secure

Having clear and legally binding payment conditions can help in this direction. In case the customer misses the payment under these guidelines, you can follow some prompt actions to get your money.

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Example Of Payment Terms Of The Invoice

To get a better understanding of the important role of payment terms on your business’s financial conditions, take a look at an invoice which shows some factors related to payment terms. Invoices usually contain several basic things such as the business name, the invoice amount, and the method of payment. This could also be done through customization, like company logo and personalized marking.

Example Of Payment Terms Of The Invoice

How Payment Terms Affect The Invoice Process

A professional, well-defined invoice should carry all the required information on payment terms and help to keep both you and your customer aligned once the work is completed. A standard bill has the following contents:

  • Date of invoice
  • Total amount due on the invoice
  • Date payment is due
  • Permissible time frame for payment
  • Policy on late payments
  • Requirements for an advance or deposit
  • Details of the payment plan
  • Accepted methods of payment

Some other important details to consider for an invoice might be:

  • Invoice number: This serves as a chronological reference for tracking invoices.
  • Dispute resolution contact: It’s essential to provide your contact details so the customer has a point of contact for addressing any concerns or disputes.

What Is The Best Way To Select Invoice Terms And Conditions?

Choosing the business invoice terms can either be the basis for your business to be strong or it can be the factor which will destroy your business. Before you decide the final terms, you should ponder over several factors.

Look at the cash flow

Do you always run out of cash near the end of the month? Or not being able to get work done at the start of a month because of no money? This may be caused by a cashout balance or not having enough cash to fulfill current financial obligations. The most acceptable invoice terms for you are those that help you receive your cash immediately once your services are finished. 

These payment methods in the following could be a great option for you: 

  • Upfront full payment
  • 50% payment upfront
  • Request for installments on which the first payment would be due immediately after the order is placed. 

Evaluate the process of cash flow monitoring with the help of experts like Xero where users are benefiting from multi-faceted services that can handle their books to taxes knowing their businesses. Ease yourself and get help from the personalized advice gained only from your success through FastLane services.

Follow the industry standard

A lot of different industries have certain payment terms and agreements with customers that they should follow. Do brief research in order to gain a better understanding of your industry standard. For example, wedding contractors would generally require an initial deposit upon booking. A hair salon, on the other hand, usually takes the cash at delivery. 

Review Client History

With your installation terms, you can set unique terms for each customer to their specific needs. Having stricter conditions like upfront payments or cash on delivery—for clients whose payment history is bad. 

However, if you are working with a customer with a perfect record, offer more lenient terms or discounts in some situations as a reward.

5 ways to select the best invoice terms

Terms regarding late fees and interest

Late fees and interest can be the smoothest way of getting your invoices paid on time. With your terms’ documentation on hand, you will have a legal basis to fall back on if your client fails to meet his obligations. In case the customers fail to pay you promptly and ignore or refuse to pay for long, you might be required to involve the law courts to help you recover your dues. An invoice normally doesn’t have the status of a legal document and that is why if you have no agreement in place, you will hardly have legal support. Furthermore, a contract can be used as the appropriate channel to highlight any late charges or fees you intend to change.

Before the implementation of any new payment terms it is important to inform your clients of the change. These are the ways to do it with respect: 

  • Send out an update email to your entire client’s list—ensure you include all vital dates and details.
  • Include new policy to all future invoices very clearly (except other business contract agreements ).
  • Call delinquent clients in courtesy and remind them about their current balance as well as when and how those new terms will affect them.

Determine Invoice Size

The small business may have to do a big invoice for huge projects. To avoid any risk and uncertainty that might be caused, a deposit could be requested as the upfront payment. One of the key things in this case is to evaluate the invoice amount, evaluate your cash flow and make an informed decision that is not solely based on trust.
FastLane Xero Trainer provides expertly assisted technology and verified expertise to handle all of your business needs. The best industry professionals and topnotch tools that would give you support just when you needed to introduce your business processes and grow can make your workload easier by automatising repetitive processes, such as invoice formatting.

How To Supervise The Modes Of Payment Terms

In addition to being able to choose when your payment is made, you also get to decide by which mode of payment the customers transact with you. To set your terms and conditions of invoice in line with your preferred payment methods, you have to ensure yourself receiving payment on due times and in full amounts. For the convenience of customers, the best is to make the process simple and easy. When it comes to the modern payment methods, you may want to consider smart invoices and credit cards.

Smart Invoices

Through software like Xero, customers will be able to pay online anytime via pay-enabled smart invoices. Smart invoices can be used for payments through credit cards, debit cards, and automated clearing house (ACH) bank transfers among other means.

Sending the invoice quickly right after completing the order or service is critical for you. Late payments can sometimes be the result of delays or even cash flow interruptions. With this feature, you may set up automatic and recurring bills to make things go easier, which improves accuracy and reduces the problem with invoicing. In addition, you may prefer to use email and supply credit card deductible info directly to the customer. FastLane provides a fee-free email and ACH merchant service account and instant cash out to business bank account.

Credit Card Or Mobile Payments

You may as well collect credit card payments, for which allow your customer to provide you with a credit card number. Perhaps, you might as well use the Xero Partner app to accept mobile payments with its hardware that processes all types of credit and debit cards from your smartphone.

Nonetheless, keep in mind that you will have to pay the higher fees that often come with credit card payments. Some of the shop owners remain the fees while the rest make the customer’s to pay for the fees. On the other hand, you have the option of making the other person pay. You should convey this in your contract. The agreement should explicitly indicate that if the customer will pay by credit card, you will charge the customer a credit card fee.

Make Security A Priority

Another factor that we should consider is that invoice payments security is a matter that we should not overlook. It’s easily imaginable that invoices will be sent in your name causing a financial loss not only to your clients but also to you. The automated updates of Xero software ensure the safety of your data and bring you assurance and peace of mind.

Frequently Answered Questions

Payment terms is a agreement that builds your expectations and illustrates in detail how, when and by what method your clients or customers are responsible to provide payments to your business.

Contract payment terms are crucial as it is vital to know that exactly how much is going to hit your account and when. This helps in accurate cash flow projections.

Terms of payment should be formulated before sending out an invoice and they should still be updated any time when a payment structure goes through changes. All invoices must state clearly the payment terms.

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