A quick guide to popular invoice payment terms.

Sep 10 2019 | Contributing writer Gene Marks, Small Business Expert, CPA, and PayPal ambassador

An invoice is a confirmation that a service has been performed or a product has been shipped. People can say that invoices are confirmations or receipts, but let's not kid ourselves: most of my clients invoice their customers because they want to get paid - which is why you have to include payment terms on every invoice.
Yes, it's important that your customers know the details of what they bought from you - amounts, dates, accepted payment methods, descriptions, quantities, etc. – but just as important is laying out the rules for customers to pay you. An invoice is a legal document that's providing proof of sale. Without any payment terms, how would a third party - a lawyer, a judge, an arbitrator - determine if a customer is behind on payment?

Popular small business invoice payment terms.

You can have different terms for payment depending on the customer. Your payment terms on any single invoice should be clear, understandable and consistent. You should agree on the terms in advance (when you take the order or sign the contract) and your invoice should reflect that. By the way, don't be afraid to use different terms for different line items, besides the net amount due stated on your invoice. These are some of the typical terms that my clients use.
Invoice payment termsNet 30 is the most common invoice payment term, but keep in mind that customers – particularly the larger ones – will likely negotiate Net 45 or Net 60 terms to offer them extended time to pay.

When you give customers a 2/10 Net 30 payment term, you're telling your customer that although the invoice is due in 30 days, you'll give them a 2% early payment discount if it's paid in ten days. If you need to increase your cash flow, giving this incentive for early payment could be a big help. 1/10 or 3/10 means the same thing, except the discount is 1% and 3%, respectively.

EOM and 15 MFI are less common invoice payment terms. I don't see that EOM terms offer very much - unless it's the due date for a recurring, monthly bill. The idea is to motivate your customers to get cash in by the end of the calendar month or the same month of billing. Your customers who got their invoices during the first week of the month may not mind, but those who received product on the 29th might have an issue with these terms for payment. Besides monthly recurring invoices, the only practical use of an EOM payment term is if you do all your billing at the beginning of a month. I recommend billing as soon as the work is done – don't wait for a specific day.

Many people advise against using Upon Receipt payment terms because customers tend to just ignore them. When you tell someone "upon receipt", you're basically saying, "I realise that almost everyone pays in 30 days, but you owe me the money now". That said, when people agree to these terms, it can boost your cash flow and give you a head start on collecting the payment because you don't have to wait 30 days. It's for those reasons that I use these standard terms on my company's invoices. If people agree to it and pay me early, why not?

You have to include an invoice payment term on every invoice.

Ask any accountant and they'll tell you that a sale takes place once an invoice is sent (assuming you're invoicing promptly). But ask any experienced business owner and they'll tell you that a sale actually takes place when the customer’s money is in your bank account. You can invoice your customers all day but if they're not paying you, you're not going to stay in business very long. That's where your invoice’s payment terms come in.

Invoice payment terms by industry.

When you state your terms for payment, make sure they're something your customers will recognise.  For example, most manufacturers expect 30-day payment terms. My clients in the construction industry could never ask for 30-day terms and usually have to settle for 60- or 90-day terms. Most people dealing with the government expect 90- or 180-day terms.  Companies selling commodities, like scrap, want payment within a few days at most.

The takeaway here: you shouldn’t do anything out of the ordinary or you may risk creating confusion and receive a late payment. Talk to others in your industry, ask questions at trade shows, do your research.

Most importantly, give customers an easy way to pay.

Giving your customers an easy way to pay may help you get paid faster. For example, 79% of businesses using PayPal Invoicing reported that they received payment on an invoice within a week from the time the invoice is sent out.1 You can try it for free first using their Invoice Template Generator tool.
 
The lesson here: Pay close attention to the payment terms on your invoices. My best clients do.

About the author.
Gene Marks
Gene Marks, Small Business Expert
Small business keynote speaker and CPA, Gene Marks helps small business owners, executives and managers understand the political, economic and technological trends that will affect their companies so they can make profitable decisions.
The information in these articles does not constitute financial, business or investment advice of any kind and does not count as a substitute for any professional advice. Always do your own research on top and seek professional advice if you want to ensure that what you do is right for your specific circumstances. Where we link to other websites, we can't be responsible for their content.

1Source: comScore, based on a survey of 1,226 US and Canadian small- and medium–sized business owne­­rs asked how long on average it takes to receive a payment on an invoice from the time the invoice is sent out, using their primary invoicing tool, December 2017. 320 of surveyed businesses are currently using PayPal. 


 

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