Creating Payment Terms for Your Invoices
Businesses rely on regular cash flow in order to pay their employees. This money, in turn, comes from clients and customers. Hence, to pay employees their salaries and to pay various operational costs such as utility bills, a business needs to get paid for their overall output.
This is where invoice payment terms and conditions come into the picture. Invoices are bills for services rendered or products sold, while ‘payment terms and conditions’ refer to the period of time and the conditions, within and under which, buyers are required to reimburse sellers for any products and services they might have purchased.
Why payment terms are important
Being able to determine its cash inflow according to a fixed schedule means that a business can pay its employees on time and meet any other monetary commitments that it may have. This can prove to be something of a tightrope walk. On one hand, businesses have a responsibility to their employees, and on the other, their payment policy shouldn’t alienate their clientele because of its rigidity or inflexibility.
As is normally the case, the company can strike a balance between these two extremes by creating payment terms that allow them to satisfy both parties. Here are some examples of standard invoice payment terms, some of which are more client-friendly than others. This is followed by some useful tips regarding how these terms are presented and which payment period is the most attractive.
- Immediate payment: This is the cash on delivery (COD) or ‘payment on receipt model’ that most retail outlets use. While it ensures on-the-spot remuneration, it could prove unpopular with clients who may not always have the exact amount at hand.
- Line-of-credit pays: As the name suggests, this payment-type allows clients to settle their bills over a period of time, either on a monthly or quarterly basis, having in effect bought a particular product or service on credit. While large companies are capable of offering such terms, most SMEs aren’t.
- N/10, N/30, N/60, etc.: These alphanumeric fractions imply that ‘net payment’ must be received within a period of 10, 30 or 60 days.
- 2/10 Net 30: This phrase is a short form for, 2% discount on payments received within the stipulated 30-day limit. This is a fairly attractive proposition in that it appears to acknowledge and reward—even if symbolically—a client’s effort to make their payments in a timely manner.
According to industry research, the language used to communicate payment terms is also very important.
- ‘Days’ instead of ‘Net’. Saying ‘pay in 30 days and save 2%’ as opposed to ‘payment terms 2/10 Net 30’ garners a better response from buyers. This is probably because of the clarity of the wording. Net 30 sounds like jargon, while 30 days is unambiguous and therefore more actionable.
- Interest on delayed payments. Ironically enough, research suggests that penalizing a late payment ensures that it is paid late rather than early! This could be because customers see this as a leeway of sorts, which comes at a cost no doubt, thus automatically clubbing these bills with their other credit payments.
Be sure to choose politely worded and unambiguous payment terms to expedite the payment process.