Setting appropriate invoice payment terms is an important part of ensuring seamless cash flow to the business. For entrepreneurs and new businesses to get paid faster and establish cordial relationships with customers, it is important to understand the invoice terms to be provided for the customers.
An important rule of invoicing is trying to get paid at the earliest. Usually, NET 30 is the standard invoice term for small businesses, meaning payment within 30 days of receiving the invoice. Sometimes, it is NET 15, NET 7, or even cash on delivery (COD).
Since each business requirement is different, there’s no “one-size-fits-all” approach to selecting the invoice payment terms. Some of the factors that go into selecting invoice payment terms include:
1. Client Payment History
Find out if the client maintains a good history of paying on time. This can be done by pulling up the business credit report. If the report does not show timely payments, asking for upfront payment on the invoice, or requesting payment within a shorter deadline is advisable. Even if the credit scores are good, there is always some level of uncertainty in payment for the first time. Requesting for payment at different phases is also another way to ensure timely payments are made.
2. Size of the Invoice
The rule of the thumb here is, the smaller the invoice, the lesser the time for payment (usually NET 10 or immediate payment). Larger invoices may be given a longer deadline for payment. In case, it’s a large project with a new client, the usual practice is to ask for an upfront deposit to reduce the risk of non-payment.
3. Late Fees & Discounts
This factor is most important when it comes to clients with longer payment terms. To enforce your payment within the due date, it’s customary to levy a late fee of 1.5-2 % of the invoice payment amount. Late fee is an indication of urgency to make payment. It requires follow up on a regular basis if invoices are coming late every month. It is important to cite the reason for the late charges, in cases where payment is pending for many months.
Early payment discounts are a good way to make customers pay before the due date. If a payment is made within 10 days on a NET 30, a 2% discount is usually given. It is also a great way to show appreciation to clients and reduce gaps in your cash flow.
Invoice payment terms need to be specified at the start of the business to maintain a healthy working relationship at all times. Since no two clients work the same way, it has to be fine-tuned to their working style, as well.
Choosing the right invoice terms goes a long way in seamless cash flows for new business owners. Are you looking for end-to-end accounting services, without you having to dent your budget by hiring in-house? SmartFin offers tailor-made accounting services to SMBs, enabling them to choose the right invoice terms and drive timely cash flow. Would you like to know how to leverage this advantage for your business? Contact us now.