Getting paid on time can be vital to the success of any business. If you’re counting on customer payments to pay staff, purchase inventory, or invest in growth, you can’t afford to wait for slow-paying customers. 

One of the simplest ways to ensure you receive payments on time is to set out your payment terms when you raise an invoice and send it to your customer. Outlining your terms and conditions can encourage faster payments and safeguard your business if a customer doesn’t pay you on time. 

In this guide, we’ll take a closer look at payment terms. You’ll learn what they are and why they are important. We’ll also reveal the steps you can take to minimise the impact of late payments. 

What Are Invoice Payment Terms?

Payment terms are the conditions of an invoice outlined by the seller. They make it clear to the buyer when the payment is due, how it can be made, and if any penalties will be incurred if the buyer fails to meet the designated terms.

For example, invoice payment terms could include:

  • The accepted forms of payment (bank transfer, credit card, cheque, etc.)
  • Early payment discounts
  • Late payment penalties

The most important payment term is the due date. This is the deadline for the customer to pay the invoice. 

In many industries, the standard payment terms are 30 days from the invoice’s date. However, the Government’s Payment Times Reports Register reveals that 48 days is the average longest payment term offered to small businesses.

Why Are Payment Terms Important?

Payment terms are important because they detail when you can expect to receive payment. This gives you more control of your cash flow. You can predict your working capital over time. 

This is crucial for financial planning. You can be more confident that you will have the funds to cover outgoings, plan for expansion, and keep your business growing. 

It is not good for your business or your mental health if you don’t know when you will be paid. According to the 2020 Small Business Owners and Mental Health Report, managing cash flow is the leading cause of stress and anxiety among business owners.

Payment terms can also help you to recoup funds in the event of a customer being unable to pay. If the invoice terms are breached, you have a stronger case if you need to engage with debt collectors or start a litigation process. 

Ideally, your payment terms will help to avoid customer non-payment in the first place. 

What To Include in Your Payment Terms?

There are some standard terms that every invoice should include. But there are also some additional terms that you may want to incorporate, depending on your business circumstances. 

Here are the standard payment terms that you should include in every invoice you send to a customer:

  • The date the invoice was raised
  • The total payment due
  • The date the payment is due
  • Details of any required deposit or advanced payment
  • Acceptable payment methods
  • Early payment discount information
  • Late payment penalties and fees

Setting out your payment details makes it clear to the customer when and how they should pay the invoice. It removes any potential confusion that could result in the customer failing to make the payment by the required due date. 

8 Solutions for Late Payments

If slow-paying customers are causing cash flow problems, there are several strategies you can implement to collect payments faster. You can read more about these tactics in our guide on how to collect unpaid invoices from customers.

However, there are some other things you can include in your invoice terms to encourage swift customer payments, including:

1. Be Polite

One of the simplest ways to reduce late payments is to be polite when you outline your payment terms. As well as encouraging faster payments, being polite and using a friendly tone can help to maintain the client relationship and increase repeat sales.

A study by FreshBooks revealed that including a simple “please” and “thank you” in your payment terms can increase the number of invoices that are paid on time.

2. Set Specific Due Dates

Setting clear, specific due dates can help you to avoid late payments. While terms like “Net 30” state the expected payment date, they make your terms more complicated than they need to be. 

Be specific and include the exact date that the payment is due. For example, you can include “Payment Due in 30 Days” and the exact date – “Payment Due December 15, 2022.”

3. Try Shorter Payment Terms

If you want to speed up your business cash flows, you can reduce the net payment period that you offer to your customers. The standard for many industries is 30 days, but you may be able to reduce your payment terms for new and existing customers. 

It’s important to note that not all customers will be happy with shorter payment terms. So before changing the terms for existing customers, reach out and see if they can meet your new payment conditions. 

4. Include Late Payment Penalties

Late payment penalties provide a disincentive for overdue payments. For example, you can add a 2% late fee each month that the invoice is outstanding. 

Make your late fee policy clear and stick to the conditions outlined in your terms. If a customer fails to make a payment on time, politely enforce the late fee/penalty. 

5. Offer Early Payment Discounts

While disincentives can speed up customer payments, you can also provide an early payment discount to incentivise your customers to pay you faster.

For example, you can reward prompt payments by offering a 2% discount on the total invoice value if payment is received within 7 days of the invoice being raised. 

6. Send Invoices as Fast as Possible

The faster your customer receives your invoice, the quicker they will pay you. That’s why it’s so important to have an organised and efficient invoicing system. 

As soon as you have completed an order, send the invoice to your customer. When you send out an invoice upon completion of an order, the value you provided to the customer will also be fresh in their mind.

7. Keep In Contact With Debtors

You don’t want to harass customers for payment, but staying top of mind can make the difference between a timely or late payment. 

When the invoice due date is approaching, you can send a friendly email reminder. And a polite phone call can often prompt the customer to pay if the invoice is overdue. 

Keeping in touch with debtors can also result in repeat orders and stronger client relationships. 

8. Invoice Finance

If extended payment terms and slow-paying customers are causing cash flow problems and holding back the growth of your business, you may want to consider Invoice Finance.

Invoice Finance is a type of business funding that allows you to release the capital tied up in your outstanding sales invoices. Instead of waiting 30+ days for your customer to pay, you can submit the invoice for financing. 

The invoice financing company will provide an immediate cash advance of up to 95% of the invoice value. Then, when your customer pays the total sum owed, you get the remaining balance of the invoice, and fewer fees.

There are several types of Invoice Finance, with some facilities including collections and account management as additional services. 

Read our guide, What Is Invoice Finance?, to learn more about this type of financing and how it works. 

Getting Paid on Time With ScotPac

Predictable and prompt customer payments are crucial for business cash flow. If you don’t make your payment terms clear, you increase the risk of late payments and stretched working capital.

Using the tactics we’ve listed above, you can strengthen your financial position and ensure that cash flow meets your working capital needs. 

If you need some support overcoming slow customer payments, ScotPac can help. We offer a range of cash flow finance solutions, including Invoice Finance. 

We can help you improve your collections and make sure you get paid faster for the goods and services you have already sold. 

Get in touch using our simple online enquiry form or give us a call on the number below.