When you’re a small business owner, getting paid on time is a top priority. If you don’t set up the right payment terms with your customers, this can lead to late payments, poor cash flow and unnecessary stress in your business.
Fortunately, there are simple steps you can take to improve your billing methods. This article will look at 15 common accounting payment terms and how to use them in your business.
When you send your customers an invoice, the payment terms set the expectations regarding future payment. They let your customers know how you prefer to be paid, and when they need to pay you by.
The payment terms will also sometimes include the penalties for a missed or late payment. It’s important to set up transparent payment terms, so your customers know what to expect. The more straightforward these are, the easier it will be for your customers to pay you on time.
When you send a new invoice to a customer, it should include all the information they require to pay you accurately and on time. Here is an overview of the information you should include.
Payment terms are usually included on an invoice as an abbreviation. Here are some of the most common invoice payment terms you need to know.
Your small business’s cash flow depends on how quickly your customers pay you. Having clearly defined payment terms will make it easier to forecast cash flow, take on new projects, and invest in new opportunities.
If you are too lax on the payment terms or don’t follow up with customers who have outstanding balances, your business’s cash flow could suffer – something that causes 82% of small businesses to fail, according to a U.S. Bank study.
You can use payment terms to control how and when your customers pay you. These terms set the expectations on payment from the start, so you avoid any confusion down the road.
Here are a few tips on how to use payment terms to your advantage:
If you struggle to get your clients to pay their invoices on time, you may need to set up more effective payment terms. Here are seven tips for setting up better payment terms for your clients.
First, you can simplify your invoicing process and finances if you use accounting software. The right accounting software will allow you to send invoices more quickly and with fewer errors.
Plus, you’ll be able to track your upcoming payments, send automated late payment reminders and easily reconcile your account. And accounting software will ensure that your financial records stay organized and that you’re prepared for tax season.
Before you start working with a new customer, make sure they understand and agree to your payment terms. Explain the terms verbally to your client and include a written description in the contract you send. This will help eliminate any misunderstandings about how much customers owe you and when payment is due.
Want an easy hack for getting your clients to pay you faster? Be polite when you invoice your clients, and include the words “please” and “thank you” somewhere on the invoice.
A study by FreshBooks found that invoices that include a “thank you” in the invoice terms get paid almost 90% faster. And 45% of those invoices get paid in seven days or less, while 12% get paid in 14 days or less. Using “please” has a similar result; these invoices get paid 88% faster.
Have you ever tried to make a purchase at a store and discovered that the business only accepts cash payments? Think about how you felt when you realized this – were you frustrated and annoyed by the inconvenience?
That’s likely how your customers feel if you offer them limited payment options. If you want them to pay on time, make it as easy for them as possible. Offer various payment methods such as credit cards, debit cards, online payments, ACH or even cryptocurrency payments.
One of the best ways to get your clients to pay sooner is to shorten the due date. It sounds obvious, but if you give your clients a long time to pay, they will usually take it.
For many industries, Net 30 is considered the gold standard for payment due dates. That’s a good time frame, but if you have a client who regularly ignores your Net 30 due date, you might consider shortening it to Net 21 or Net 14.
Obviously, you want your clients to pay you on time, but you do want to recognize that sometimes you’re working with another business, and that company may grapple with cash flow issues of their own. Some businesses simply cannot accommodate Net 14 or even Net 30 payment terms, and will appreciate more flexible conditions.
If you have a client who regularly pays late, talk to them to find out what the holdup is without putting any unnecessary pressure on them. Try to come up with payment terms that work for everyone.
Think about offering an early-payment discount to your customers. For instance, your standard terms could be Net 30, but customers receive a 2% discount if they pay the invoice within seven days.
So, if you send your customer a $5,000 invoice, they’ll receive a $100 discount for paying the invoice early. These discounts add up over time, so many customers may take advantage of that.
Of course, this type of discount means you’ll accept less money on the invoice. But the improved cash flow may be worth it for your business.