June 17, 2019 Bookkeeping en_US Whether you’re invoicing for the first time or trying to inspire on-time payments, these payment terms will help you set boundaries with your clients. https://quickbooks.intuit.com/cas/dam/IMAGE/A8i07vI15/e407786ecae6e4271dd14604ce867542.jpg https://quickbooks.intuit.com/r/bookkeeping/choosing-and-defining-invoice-payment-terms Using Payment Terms to Protect Your Freelance Career
Bookkeeping

Using Payment Terms to Protect Your Freelance Career

By Ritika Puri June 17, 2019

As a self-employed freelancer or small business owner, knowing how to send an invoice correctly is crucial. How else are you going to get paid? You won’t. In fact, in 2016 there was nearly $825 million owed to small businesses in unpaid invoices. Yikes.

Sending a proper invoice ensures that your clients pay you the total amount on time, otherwise you have some legal recourse you can take.

But you can’t just email your clients a picture saying, “Pay up.” (Well, you could, but you’d look like a real jerk.) To make sure you’re getting paid properly and your clients are respecting you as a freelancer, you need invoice payment terms.

What are invoice payment terms?

In short, invoice payment terms outline how, when, and by what method a customer — that’s your client — remits payment to a seller — that’s you. Components include:

  • The total amount due
  • The period of time that your client has to pay the amount owed
  • Stipulations for an advance or deposit
  • Payment plan details
  • A list of accepted payment methods

Invoices serve as a schedule, outlining when your organization will receive income. Your invoicing system should benefit your company at a strategic level. This guide will equip you with the skills you need to send invoices successfully.

The importance of invoice definitions

The best-run businesses have control over their cash flow, tax planning, and growth position. Knowing how much money is going to hit your account and when it’s going to do so is essential to cash flow predictability. Proper cash flow predictability allows you to determine the best time to expand or scale back your business.

Invoicing is critical to cash flow predictability. By putting together a proper invoice, you ensure that clients pay you in a timely fashion. That is, assuming you have an invoice date that dictates when the client needs to pay you and what the penalties are for missing a payment. If not, your cash flow projections will be off, adversely impacting your company.

For instance, imagine that you’re a baker about to open a new store next month. To do so, you need to purchase $5,000 in kitchen equipment. You recently catered a large event and submitted an invoice for $7,000. You estimate that the customer will pay the invoice by the end of the month.

However, they do not do so. As a result, you cannot purchase the kitchen equipment. Now, you’re paying rent for the second store, even though you’re not conducting any business out of the location. You begin to lose money as a result of the late payment.

This is a simple example, but it’s one that clearly demonstrates the need for timely invoice payments. Putting together a concise, easy-to-understand invoice will go a long way toward ensuring you receive payments on-time.

Types of invoices

The first step toward making sure you invoice properly is sending the correct kind of invoice to your client. There are a few types of invoices that you could send.

Purchase invoice

A purchase invoice is the first type of invoice that you’ll send to a customer. You should send the purchase invoice, or purchase order, as soon as you agree to the contract. A purchase invoice provides a quote to the customer based on the terms they agreed to.

Pro forma invoice

A pro forma invoice gives your client an estimation of the total cost of goods and services. A pro forma invoice is similar to a purchase order, except for the fact that you provide it after you’ve begun work. By providing your client with an up-to-date quote, you allow them to get their finances in order, increasing the chances of on-time payment after you finish working.

Sales invoice

While you submit a pro forma invoice in the middle of a contract, you send a sales invoice after the completion of a contract. A sales invoice is the most common type of invoice. It serves as a request for payment, detailing the goods or services you provided to the customer. You’ll provide a sales invoice to a customer after a transaction. The sales invoice will serve as a record of sale for both you and the customer.

Interim invoice

If you enter into a large contract with a customer, you may not want to wait until completion to receive payment. For instance, imagine you enter into a three-year agreement. You could opt to receive payments, say, every three or six months. Or you could invoice based on when you complete a particular stage of the project. You would submit an interim invoice to do so. You should discuss this timeline with your customer before you begin work.

Recurring invoice

If you provide ongoing services, you’ll need to submit a recurring invoice. An example of an ongoing service would be an attorney who’s on retainer. Recurring invoices are also standard for businesses that provide membership or subscription services.

Essentially, a recurring invoice is a great fit for any type of work that doesn’t fluctuate, or for a recurring fee like the retainer one previously mentioned. If you have clients that require the same exact work every single month, they might be a great fit for a recurring invoice.

How often you set a recurring invoice is up to you, but many professionals stick to once a month. This keeps billing nice and tidy for both you and the client.

Past due invoice

If your client doesn’t pay within your pre-defined period, you’ll want to send a past due invoice. A past due invoice details the remaining balance the customer owes. It would also detail any interest you’ve charged the client as a result of their delay.

Controlling the timing of a payment

When negotiating a contract, payment terms are essential. Payment terms should maximize how quickly you’re paid while also minimizing inconvenience for your customer.

It’s essential that your financial picture matches your business goals. Selecting the correct payment terms ensures a healthy business. Below are some of the payment terms that you could choose. You’ll want to include these payment terms on the invoice, but only after having discussed them with the client.

Prepayment

You can require customers prepay you for services. If you have a wedding photography business, for instance, you do not want to run the risk of cancellation. So you may want your customers to pay in full up-front. Many business owners will offer a discount to those who pay in full in advance.

50% up-front

You may not have enough capital to complete a project. If a customer is unable or unwilling to pay the entire balance up-front, one option is to compromise with a 50% deposit. Both organizations take on an equal risk. Make sure you also negotiate when you will receive the remaining 50%.

Immediate payment

Immediate payment refers to a transaction for which payment is due as soon as you deliver goods or services. Examples of immediate payment terms include “cash on delivery” (COD) or “payable upon receipt.” You may negotiate into the contract that you can repossess goods if the customer does not provide immediate payment.

Net 10, 15, 30, 60, or 90

These terms refer to the number of days in which a payment is due. For instance, Net 30 (or N/30), means that a buyer must settle his or her account within 30 days of the date listed on the invoice. For example, If you date your invoice March 9, clients are responsible for submitting payment on or before the 8th of April.

Choosing “Net” payment terms could be inconvenient for you as a business owner, as you’ll have expensed the entire project without yet receiving income. However, these terms are often quite useful for the customer. Try to find a period that works for both you and your client.

Lines of credit

Line-of-credit payment terms offer buyers credit toward the products and services they purchase. Customers can then repay the balance on a quarterly or monthly basis. There is a bit of risk involved with this, as the customer could default. Typically, only larger organizations use these payment terms.

Installment agreements

Installment agreements are similar to line-of-credit payment terms, except they’re cash-based. Companies split up big projects into milestones. The customer then pays upon hitting a milestone. Installment agreements could be based on time — every three months, for example — or upon delivery of a specific part of the project.

Subscriptions and retainers

Subscription and retainer payment terms require customers to pay regularly, such as monthly or annually.

Early payment

You can provide customers with an incentive to pay early. For example, consider offering a 5% discount if the customer pays the total balance in full before the due date. Early payments are a win-win. Customers receive a discount on your goods or services, and you’ll have enough capital to complete the project without having to stress.

Controlling payment methods

In addition to controlling the timing of your payment, you also have a say over how the customer pays you.

The simplest way to define your payment policies is to make the process as convenient as possible for the customer. For instance, you may be accustomed to receiving paper checks or cash. However, expanding your accepted payment methods will increase the likelihood of on-time payments. Two of the more modern payment methods you’ll want to consider are smart invoices and mobile payments.

Smart invoices

Software like QuickBooks enables customers to pay anytime, 24/7. Business owners can also set up free Automated Clearing House (ACH) bank transfers with direct deposits. This could be particularly useful if you have an ongoing contract with a customer. You could set up automatic direct deposit withdrawals, which would reduce the guesswork associated with invoicing.

QuickBooks online offers a free email and ACH payment merchant service account. If you don’t set up direct deposit, you could email invoices to the customer directly with a link for payment.

Credit card payments

You can accept credit card payments as well. You can request that the client provide you with a credit card number, or you can use QuickBooks, which comes with the hardware necessary to accept credit card payments in person using a mobile device.

There are fees associated with credit card payments. Some business owners choose to pay the fees themselves, while others opt to pass them along to the customer. If you choose the latter, you’ll want to indicate this in your contract with the customer. The contract should clearly explain that in addition to the principal, you’ll also charge the customer the cost of the credit card fee if they elect this payment method.

Other information to provide

There are a few other things that you’ll want to include on your invoice as well. You’ll want to add an invoice number. This will allow both you and the customer to track invoices chronologically. You’ll also want to provide your contact information. That way, if there are any disputes, the customer knows exactly who to contact so you can resolve the problem quickly. You can also indicate where you want the client to send a payment receipt.

Define your terms in a contract

It’s crucial to negotiate your payment terms with your customer before you begin work. Work together to determine what will be the right approach for both sides. Once you come to a consensus, outline these terms in your contract.

This documentation gives you legal standing in case your customer doesn’t pay on time. If you don’t receive prompt payment and your customer ignores your past-due invoices, you may need to take legal action to recoup the funds you’re owed. If you don’t have a contract in place, you won’t have any legal standing in a court of law.

This is also the perfect place to outline any late fees you plan to impose. Will there be EOM, or end of month, fees? How about punishment or fees for non-payments that go missed entirely? This area serves to protect both of you, so it’s in your best interest to be as thorough as possible.

Invoicing for on-time payments every time

Cash flow is the underlying financial infrastructure for your company’s operations. Receiving prompt payments from customers allows you to focus on your day-to-day business functions and growth.

If you’re looking for examples of invoices, be sure to check out our free template. This template allows you to enter the necessary information to produce a professional invoice for your client. Also, remember that QuickBooks can help streamline your invoicing process to ensure on-time payments.

Download your free invoice template

Ritika Puri

Ritika Puri is a marketing consultant, business sociologist, and entrepreneur who runs Storyhackers. She enjoys helping companies reach and engage with audiences who love to learn. Read more