8 Tips for Setting Your Invoice Payment Terms to Improve Cash Flow

Are you using the right invoice payment terms? Learn how to set effective terms that help ensure prompt payments and steady cash flow.

How your business sets invoice terms can impact your cash flow and, ultimately, your capacity to pay your bills and employee wages, and invest in opportunities to grow. Late invoice payments are a key cause of cash flow issues for small and mid-sized businesses. In fact, nearly half of all B2B invoices in the US are overdue, and almost all B2B businesses in the US (93%) have reported receiving late payments.

Fortunately, you can avoid or reduce late payments by prioritizing your billing processes and setting the right invoice payment terms. At the same time, it is important that your terms help build and maintain good relations with your customers.

In this post, we’ll explore the most common invoice payment terms and suggest nine tips to help you set and negotiate the best terms.

What are invoice payment terms?

Invoice payment terms outline how, when and by what method your customers will provide payment to your business. They are an agreement that covers your expectations for payment, including any late payment penalties if your customer fails to remit payment on time. These terms can help you accurately project and maintain cash flow, and establish financial strategies for your business. Payment terms are an essential part of negotiating a contract, and should maximize how quickly you are paid while minimizing inconveniences for your customers.

What are the most common invoice payment terms?

• Payment in advance (PIA): Refers to payments or deposits made in advance. For example, a customer might make a 50% deposit on an order with the balance due on completion of the order.

• Due upon receipt: A payment due upon receipt is a payment that customers must make immediately upon receiving the invoice for a transaction.

• Net 7, 10, 30, 60, 90: These terms refer to the number of days within which a payment is due. For example, net 30 means that a customer must settle its invoice within 30 days of the date listed on the invoice.

• 2% 10 net 30: Customers will receive a 2% discount if the invoice is paid within 10 days; otherwise, the full amount is due in 30 days. For example, an invoice for $2,000 could be settled for $1,960 if it’s paid within 10 days.

• Line of credit pay: Most common among larger corporations, line of credit pay gives the customer the ability to pay its invoices over a period of time, such as monthly or quarterly.

Tips for setting and negotiating invoice payment terms

Choosing the best payment terms for your business is critical because it can help you manage and optimize cash flow. Here are some tips for setting invoice payment terms:

1. Know your company’s cash flow position

Although you should keep customer expectations and industry standards in mind when setting invoice payment terms, your primary concern should be your cash flow needs. Therefore, detailed knowledge of your own cash flow position is a must for negotiating payment terms.

2. Assess the customer’s credit

Before entering into any new customer relationship, it is helpful to run a credit check. It is also good practice to ask new customers to complete an account application, with financial and trade references, if applicable. Credit checks with a credit bureau will provide you with an assessment of a company’s creditworthiness. Trade references will give you a further indication of the customer’s trustworthiness and financial state.

3. Know the standard terms for your industry

Net 30 (payment due within 30 days) is a common standard for many businesses. However, payment terms can vary from one industry to another, so it’s in your best interest to consider what your customer is familiar with. In construction, the average is 90 days or more. In the fashion industry, the norm varies from net 30 to net 60.

4. Consider the invoice amount

If you are invoicing for a small amount like $200 or less, requiring immediate payment (due on receipt) or terms of net 10 may make the most sense. For larger invoices running to tens of thousands of dollars, terms of net 60 or 90 may be appropriate.

5. Leverage innovative solutions to offer early payment discounts

Early payment discounts offer an incentive to customers to pay you before the invoice due date. With static discounting, customers are typically given just two options: full payment at the end of the invoice term or a discounted amount before a fixed date. Dynamic discounting allows customers to pay any time before the agreed term and receive a variable discount.

6. Charge late fees for overdue payments

Consider adding late fees or interest charges to your invoice terms to enforce your payment expectations. A late payment fee is a percentage of the total amount on your invoice charged to the customer according to your payment terms. Adding a late fee of 1.5% or 2% is standard for overdue payments.

7. Ensure terms are crystal clear and documented

Be sure that all payment details — amounts, due dates, discounts, late fees, etc. — are spelled out explicitly in all contracts and invoices. Documenting your terms gives you legal standing in case your customer doesn’t pay on time.

8. Be flexible and communicate effectively

Above all, be professional and polite, and ensure you keep the lines of communication open with your customers. If a customer pays late regularly, have a conversation to understand what the circumstances are and update your terms if it works for everyone.

Summary

The key to optimizing your cash flow is to get paid as quickly as possible. Therefore, it’s critical to understand the ins and outs of invoice payment terms and learn how to set and negotiate yours so that you are more likely to be paid in a timely manner.