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Invoice payment terms: Top tips to getting paid on time

February 9, 2023
Maintaining a healthy cash flow is key for any entrepreneur, but if you’ve just started a new business, prompt payment is all the more critical. Most small businesses don’t have large balance sheets, and as a result don’t have the cash flow to manage long delays in payment for invoices.
Such is the scale of the problem of late payments that’s it’s estimated there is currently over £23.4 billion owed in outstanding invoices to UK businesses. The UK government has even set up the Payment and Cash Flow review to scrutinise existing payment practices and help protect small businesses.

What are invoice payment terms?

In short, invoice terms are contractually agreed terms between your business and a customer, outlining how, when and which method your clients or customers will pay invoices. This is similar to how an acknowledged purchase order forms the basis of a supply contract between you and a supplier.Invoice payment terms are also an agreement that set your expectations for payment. This doesn’t just include when the customer needs to pay you, but the penalties they will incur if they miss a payment.

What should payment terms on an invoice include?

The terms of your invoice payments should cover when your company expects to receive payment for the goods or services provided.Invoicing payment terms include:
    Invoice date Total invoice amount due Date payment is due Period of time that your client has to pay the total amount owed Any stipulations for an advance or deposit Payment plan details Details of accepted payment methods Invoice number Your contact information, should your clients run into cash flow problems of their own

Types of invoice payment terms

Before we give you the lowdown on why agreeing the right payment terms is so important for small business owners, here are some of the most common terms used for requesting invoice due dates:
Invoice payment termMeaning
PIAPayment in advance (also sometimes called a proforma payment
Net 7Payment 7 days after invoice date
Net 10Payment 10 days after invoice date
Net 30Payment 30 days after invoice date
Net 60Payment 60 days after invoice date
Net 90<Payment 90 days after invoice date
EOMEnd of month
21 MFI21st of the month following the invoice date
For more information on invoicing, check out our other posts on proforma invoices and how to deal with an unpaid invoice.

Why do payment terms matter?

Agreeing the right payment terms with your customers is crucial for your cash flow. When you know when you’ve got cash coming in, you’ll be able to reinvest the money back into your business, making it easier to plan for the future.

Improves your cash flow

Cash flow is the lifeblood of your business, and staying on top of yours can keep your business running smoothly. Predicting your cash flow will also help you manage the growth of your business, as well as making it easier to pay manufacturers and suppliers on time.It’s also good to know when you can pay yourself. If you’re a sole trader, you’ll be able to keep all profits after tax and business expenses are accounted for, and late payments could result in you struggling to make ends meet.

Impact on your balance sheet

Not only can having a high value of unpaid invoices affect your cash flow, but it can also make your balance sheet appear weaker than it should. As a result, both the growth and profitability of your business might suffer.

Time lost in chasing invoices

Aside from the impact on your cash flow and balance sheet is the effect unpaid invoices can have on your time itself.
One report found that the average SME owner spends up to 2 hours per day chasing or expediting overdue invoice payments. This unprofitable financial admin prevents small business owners from focusing on other tasks, such as pursuing opportunities for growth.

To boost your chances of getting payments before their due dates, check out our top tips on setting payment terms for your invoices to make late payments a thing of the past.

Send invoices in advance of work being completed

Although the legal payment terms for businesses are 60 days after work has been completed, if you’re dealing with a new customer with whom you have no prior payment history, it’s always worth trying to negotiate payment upfront (PIA or pro-forma) invoice payment terms.If upfront payment isn’t possible, offering payment options can mean you get at least some of your payment before project completion. For instance, you could request 50% with placement of order and 50% following completion of work, or agree payment milestones.To boost your chances of early payment further, consider offering rewards or discounts for clients who pay in advance.

Send invoices immediately after work is completed

If invoicing and pro forma payment terms aren’t possible, the next best option is to send an invoice to your customer as soon as the work is finished. This is commonplace in some industries such as construction.Invoicing as soon as work is completed can have a more positive impact on speed of payment in what’s known as recency bias.When you send the email to accompany your invoice, it’s important to again reiterate your invoice payment terms. If you plan to send any payment reminder emails prior to the payment due date, consider reiterating them in each email.

Include all relevant information

This may sound obvious, but making sure you include all the key information, such as details around the work carried out, the invoice due date, VAT details, bank details and your payment terms. To avoid missing anything important, you might want to consider using invoicing software to generate invoices for you.To deter clients from making any late payments, consider adding a footnote at the bottom of your invoices to state that a percentage will be added to any unpaid invoices in late fees.

Make use of automated software or apps

Investing in invoicing software — such as Ember — can boost your chances of getting paid in a timely manner.

As well as creating a professional-looking template for you to use, you can keep track of all outstanding invoices and automate reminder emails whenever you need to give your clients a nudge.You’ll also benefit from making it possible to take online payments using both debit and credit card payments, or by making it possible to set up a direct debit if you run a subscription service.

Credit check new customers

A good credit check provides insight into the financial results of your customer, how good they are at paying other suppliers and whether they have any county court judgments against them. While there is a cost involved with running a credit check, but it could save you thousands in the long run.You may want to set some rules when deciding whether to run a credit check on a new customer determined by the size of your business, as well as the value of the potential order. Taking legal action can be timely and expensive, so a good credit check can prevent problems before they begin.