As a small business owner, making a sale is only half the battle. Owners must also take steps to ensure that the invoices they send out are paid in a timely fashion.
Payment terms define the period of time a buyer has to settle an outstanding balance as well as the acceptable methods of restitution. Additionally, the payment terms may include discounts that buyers can enjoy by settling the invoice in advance of the date given. As the owner of a small business, you not only have to choose and define payment terms for your clients, but you must also adhere to the terms provided by your vendors and suppliers.
Importance of Payment Terms
Setting clear payment terms helps ensure your small business will receive the money needed to satisfy its own expenses.
An even more important benefit, however, is that payment terms can be used to help businesses receive payments on a predictable schedule, thus facilitating everything from budgeting, to paying salaries and more. Without that schedule, your clients may choose to pay invoices on their own schedules, which can give your business a serious cash flow problem that prevents it from purchasing the things it needs to continue to operate. Additionally, businesses that don’t set clear payment terms have no resource for collecting late fees.
It’s important to remember that choosing and defining payment terms doesn’t mean you have to anger your current clients. On the contrary, payment terms can offer clients additional options for settling their debts, such as discount programs and lines of credit. In some cases, offering better payment options may even draw business to you from your competitors.
Below are some of the most popular payment terms featured on business invoices, along with their benefits and drawbacks.
Immediate payment refers to a transaction wherein payment is due at the time when products are delivered, with phrases like “Cash on Delivery” (COD) or “Payable on Receipt.” Should the buyer fail to make a payment at this time, the seller is legally able to repossess his or her goods.
While immediate payment can be beneficial for the small business owner, this term may inconvenience clients. In some cases, customers may opt to use a different supplier that allows them to evaluate the products and services they receive before providing payment.
One of the most common payment terms, Net 30 days (or “N/30″), means that a buyer must settle his or her account within 30 days of the date listed on the invoice. It’s important to remember that 30 days is not equivalent to one month. If your invoice is dated March 9, clients are responsible for submitting payment on or before the 8th of April.
Businesses may also set invoice terms to Net 60 or even Net 90, depending on their preferences and needs.
2/10 Net 30
Like Net 30 invoice terms, 2/10 Net 30 requires buyers to pay within no more than 30 days of receipt. However, this payment type offers a discount of 2% for clients who submit payment within 10 days. Buyers who have sufficient cash flow may opt to pay invoices early in order to reduce costs over the long term.
Line of Credit
As you might expect, line-of-credit payment terms offer buyers credit toward the products and services they purchase. More popular among large companies, this type of payment term presents each buyer with a monthly invoice, which is then paid via check or bank transfer.
Sending an Invoice
As the owner and operator of a small business, you likely send multiple invoices each month. However, getting your invoice out the door is only the first hurdle. You also have to take steps to ensure your invoice will be paid in a timely fashion. To boost your chances of being paid on time, be sure to discuss payment terms before distributing products or services to clients. For example, you should let customers know if cash payments are due upon delivery and if it’s acceptable to use a credit card to settle their balances.
Wondering where to start when creating a small business invoice? It’s a good idea to keep industry standards in mind when choosing a payment type. You can also find a sample invoice template below this article and customize it based on your business’ specific needs.
Receiving an Invoice
Most small business owners deal with both outgoing and incoming invoices on a regular basis. If you receive an invoice from a vendor, it’s important to pay close attention to the options for repayment so you don’t risk losing them. While some supplier invoices set rigid payment guidelines—such as requiring cash upon delivery—others offer the option of earning discounts by paying early.
While paying early may save you money in the long run, small businesses should take steps to ensure that doing so won’t leave them short on cash. If your customers pay using Net-30 or Net-60 terms, you may find yourself lacking the necessary cash to settle vendor debts. If your vendors offer multiple payment options, you may want to keep cash flow in mind when selecting your preference.