invoice payment terms

Invoice payment terms: What are they and why are they important?

Getting paid can be difficult for B2B businesses. Here’s what you need to know about invoice payment terms so you can maintain a consistent and healthy cash flow.

invoice payment terms

Fiscal needs vary from business to business. However, the need to get paid is consistent for every organization.

Invoice payment terms help ensure you get paid every time and on-time when you bill your clients. You can communicate when and how you expect to be paid for your product or service, indicate preferred payment methods and also outline policies for missed or late payments.

Why getting paid on time matters

Getting paid can be a challenge for many businesses in the B2B space. That’s because almost 63% of sales in the industry are made on credit.

This puts a lot of pressure on business owners and CFOs to come up with funding to run their business. That’s why they rely on invoice payment terms to create a predictable payment schedule that will allow them to calculate a precise cash flow.

Invoice payment terms are a crucial part of your billing as they can drastically reduce fiscal challenges and allow for better budgeting and financial forecasting.

What is the standard payment term on invoices?

Invoice payment terms indicate how you expect to get paid, and should include details such as:

  • the due date
  • accepted forms of payment (i.e. credit cards, check, electronic transfer, etc)
  • the preferred currency you deal in (when working with international clients)
  • charges for late-payment or missed-payment

You can customize payment terms based on the industry you operate in, and how your business is set up. However, here are 12 commonly used invoice payment term examples:

 

Invoice payment terms

Definition

Net 7 Payment is due seven days from the invoice date.
Net 21 Payment is due 21 days from the invoice date.
Net 30/60/90 Payment is due 30, 60 or 90 days from the invoice date.

Longer payment terms are common within certain industries. If customers require longer terms, the company could consider utilizing invoice factoring (see below) to accelerate needed cash flow into their business.

Upon Receipt Payment should be made immediately when the client receives the invoice.
PIA Payment in advance — the client must pay a certain amount upfront, before receiving the product/service. This can be a deposit or down payment.
COD Cash on delivery — also called “payable on receipt” is when clients are expected to pay at the time of product/service delivery.
Contra If your customer is also someone you do business with, you can use a contra invoice. A contra term offsets a sales invoice against a purchase invoice, or when a purchase invoice becomes a payment.
EOM Payment is due at the end of the month when the invoice is received.
CIA Cash in advance — the client must pay the full amount on the invoice before receiving a product or service.
15 MFI Payment must be made on the 15th of the following month of receiving the invoice. MFI means “month following invoice”.
2/10 Net 30 If a client is billed a Net 30 invoice, and they pay their balance in full within 10 days, they get a discount of two percent.
Interest Invoice Charge to clients for making a late payment or failing to make a payment.

Businesses apply this term if they want to encourage customers to make a one-time payment by the due date and to recover costs from an interruption in the payment schedule.

 

Invoice factoring is an alternative funding solution that allows you to sell an unpaid invoice to a third-party factoring company for a slight discount. Businesses that have to wait for one, two or three months to get paid often sell account receivables to inject and maintain cash flow. The business will get immediate working capital, not having to wait for the client to pay the invoice, and they will not incur any debt.

Using invoice terms to your advantage

Without proper invoice terms, your customers might fail to remember—or intentionally delay— paying you.

Choosing the right terms will not only protect you from payment negligence but can also make your clients take you seriously. Here are some best practices to remember when you’re setting up your terms or revamping your billing process:

  • Make sure the invoice is clear and easy to understand by the recipient. Using the standard invoice terms mentioned above will help you make it clear on your bill as to how your customers should pay you.
  • Your customers are business owners too, so be realistic and flexible about your terms and conditions.
  • Discuss late fees with your customers and come to a mutual understanding of what is acceptable and what’s not.
  • And lastly, don’t forget to thank your customers for their business!

At Liquid Capital, we understand what it takes for small, medium, and emerging mid-market businesses to succeed – because we’re business people ourselves. Our company is built on a network of locally owned and operated Principal Offices, so whenever you’re talking to Liquid Capital, you’re talking directly to your funding source and a fellow business person. Learn more about the Liquid Capital Difference.

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