Establishing clear payment terms is one of the easiest steps on the road to getting paid on time and getting paid promptly might be harder than you think.
Across the UK, nearly 40 per cent of all invoices sent out by companies were paid late, leaving businesses with an average of £34,286 missing from their accounts.
It's not just your account balance that suffers from late payment of invoices. Recent survey data has indicated that:
- Late payments caused 25 percent of businesses to be unable to hire vital new talent.
- Around 23 percent of business owners were unable to buy new equipment due to cash flow issues caused by unpaid invoices.
- Unpaid invoices caused 20% of small business owners to cut back on their marketing efforts due to a lack of capital, slowing the growth of their business.
- A huge 79 percent of small business owners cut their pay in response to unpaid invoices, rather than incur late fees by not paying their suppliers, rent, or utilities.
While clear and well thought out payment terms aren't magically going to solve the issue of the £50 billion in unpaid invoices that UK businesses have to chase every day, it is one factor in implementing effective credit control.
If you don't currently have a clear set of invoice payment terms in place, we'll be showing you what they are, why they can help you get paid on time, and how to improve your payment terms.
A huge 79 percent of small business owners cut their pay in response to unpaid invoices, rather than incur late fees by not paying their suppliers, rent, or utilities.
What are payment terms?
Invoice payment terms, often shortened to payment terms, are instructions on how and when you want to get paid for your goods or services.
They form part of the contract you sign with your customer and set out, in detail, your payment details, your preferred payment method and how long the customer has to pay your invoice.
That last part is vital as it can have a huge impact on your business's cash flow.
Are there standard payment terms?
There are no mandated or specific payment terms you have to abide by.
In the UK, the usual payment window is 30-days and GBP is the primary currency.
In the EU, especially in Scandinavia, there is a trend for shorter, 14-day payment terms, while in the U.S 60 or even 80-day payment windows are not unheard of.
Outside of the UK, most international businesses are happiest to trade in USD.
What do Net, PIA, POD, EOM and MFI mean?
The payment window included in some invoice payment terms is often shortened to an acronym. Some of the most common are:
- Net - Often followed by a number, such as Net 30, this indicates the number of days, after the delivery of goods or services, that the customer has to make payment.
- PIA - This means payment in advance and indicates that payment will be provided before the goods or services are delivered.
- POD - Payment on delivery indicates that the invoiced amount should be paid as soon as the goods or services are delivered.
- EOM - This means end of month and indicates that payment should be made on or before the end of the month.
- MFI - This is normally preceded by a date, such as 15 MFI, and indicates that the payment should be made not later than the 15th of the month following the invoice.
What should my payment terms include?
Your unique payment terms will likely reflect the specifics of your business, but there are a few things that every set of payment term should outline:
- Your payment date - While the standard payment window is 30-days after the receipt of the invoice, you can choose to alter that window. Since most invoices are paid late, you might choose to shorten that window to 14-days. Shortening your payment window will likely mean more invoices are paid late, but you might actually still get paid faster than putting in a 30-day window.
- Your payment details - This includes your account details and your preferred payment method. Having the widest possible range of payment options makes it more likely that you are going to get paid on time. That is why our Payment Portal supports transactions as well as credit and debit cards.
- Your preferred currency - This one is rather situational, but if you do a lot of overseas trading, it can be useful for you to stipulate that you want to be paid in a certain major currency, like GBP or USD.
- Other payment conditions - This is normally where you set out what happens if the customer pays your invoice late or doesn't pay at all. It is perfectly reasonable to include late payment fees to encourage prompt payment. While nobody really wants to do it, it is also perfectly reasonable to set out that bad debt will be escalated to a debt collection agency, rather than just written off.
Why are payment terms important
If you're a small business owner, the sad reality is that a lot of your invoices are going to be paid late. Thankfully, there are steps you can take to mitigate the impact of late payments.
Having clear and highly visible payment terms in your contract gives your customers no wiggle room when it comes to paying you. Making it part of your contract means the customer has read, understood and has agreed to those terms in advance.
We always recommend that you include late payment fees as part of your payment terms to further incentivize your customers to pay on time.
How to establish your payment terms
As we've seen, invoice terms aren't an exact science. Small businesses have a lot of flexibility when it comes to defining their payment period, types of payment they accept, and other terms on an invoice. As such, you'll need to establish the invoice terms that work for your business. Remember that the goal isn't just to get your invoices paid, but also to make your business attractive to your customers -- who will factor in your invoicing process when deciding whether to work with you -- and ensure that your accounts receivable doesn't impact your overall financial health. Working out your defined payment terms is a bit of a juggling act, but once you have, you'll find that everyone benefits. After all, strict payment terms help the customer (almost) as much as it helps the business.
Assess your needs
If you've got large cash reserves and typically receive payments promptly anyway, then you'll likely be happy to keep things ticking along as usual. However, if you continually have cash flow troubles, your accounts payable list is growing, or you're always using invoice factoring services to make up for gaps in your accounts receivable, then you'll need to come up with payment terms that work for you.
If money is tight, you might insist that customers make a payment upfront or pay cash on delivery. In cases where the business has to spend significant sums on their own bills to begin work (say, on raw materials), then asking for an upfront deposit payment may make sense.
Take a look at your financial standing and establish what makes sense for your business. If past due invoices can put your business in jeopardy, then asking for payment in advance or due upon receipt, in which you get paid immediately, would be logical. On the other hand, if you're a financial institution that is happy to have its customers pay under payment terms that suit them, then do that.
Establish what's standard
You might hope that your customers pay with an immediate payment, but unless that's standard in the industry in which you operate, then it's unlikely to happen. In some sectors, businesses receive payment as soon as the goods are delivered. In others, such as landscaping, the invoice amount is typically due within 1 - 7 days. For larger scale businesses, such as construction companies, payment is due within 90 days.
While it's not a hard and fast rule, you'll likely need to work within these standard payment terms. Requesting an upfront payment may be tempting, but if every other business in your sector is operating on a longer invoice date time frame, then you'll need to as well.
Consider customer relationships
Your payment terms will also impact your customers, so it's important to think about how your due date decisions will affect them. It may be advisable to offer different customers different payment terms. For example, if a customer makes recurring payments and has always adhered to your payment process, then there'll be no need to change the invoice date payment terms. In that case, it would be better just to keep things as they are -- after all, you'll know that they'll always make a payment.
On the other hand, if a customer fails to pay their recurring invoices on a regular basis, and it's beginning to impact your cash flow, then using a shorter payment date on their invoice may be wise. They'll be more likely to make an early payment -- or just an on-time payment -- if the payment is due within a few days, and if they know that late payment fees will apply.
Ultimately, you'll need to factor in your customer's satisfaction when putting together your payment terms. If the relationship is smooth, professional, and you're making recurring deliveries, then don't rock the boat. In that case, requesting cash in advance would make no sense. On the other hand, it's more than OK to ask those less-than-attentive customers for cash in advance or cash on delivery.
How can I improve my payment terms?
Having clear payment terms is just one factor in implementing effective credit control. There are other steps you can take, including:
1. Automating your accounts receivables
Chaser's innovative take on automation allows you to keep all the time and effort saving benefits of an automated system, without any of the blandness.
Our editable templates make sure all emails sound like it comes directly from you and is sent from your email address.
You can schedule multiple email reminders to send to different customers at different times and even have our platform send out automated ‘thank you' emails when payment is received.
Chaser has helped our customers recoup 80% of their outstanding invoices and get paid an average of 20-days faster.
2. Outsourcing your credit control
Effective credit control is effort-intensive and might take you away from focusing on growing your business. You might also not be in the position to hire a dedicated staff member to manage your accounts receivables.
Outsourcing your credit control to our professional team means you get the benefit of having in-house accounts receivables staff at a fraction of the cost of actually hiring.
3. Make it easy for your customer to pay
Making it as easy as possible for your customer to pay you is always a good idea. Each Chaser reminder includes a line to a Payment Portal that is unique to your customer.
Our Payment Portals allow your customers to pay you directly from your invoice, contain all the required payment details, and support multiple payment options as well as credit and debit cards.
Chaser has helped our customers recoup 80% of their outstanding invoices and get paid an average of 20-days faster.
Benefits of having clear payment terms
Creating a payment term framework might sound like just another task to add to your to-do list, but it's worth the effort. There are clear, long-lasting benefits to doing so, and if you're continually battling with an invoice amount being left unpaid, then it might just be the difference between business success or failure. Let's take a look at just some of the advantages of putting together terms that outline the invoice date, any early payment discounts information, and the accepted payment methods.
Improve cash flow
Managing cash flow can be a challenge at the best of times. It becomes even more difficult when you don't know when those credit card payments are coming in. By setting a clear due date for cash payments, businesses can get a better grip on their cash flow, allowing them to make strategic decisions that benefit the organisation. By informing customers of the invoice date and payment methods you offer, you can increase the likelihood that you'll have money in the bank for accounts payable.
Clear payment terms = healthier customer relationships
Your customers aren't your enemy. They're your partners. Customers appreciate transparency and clarity, and will be happy to work within the timeframe for when payment is due -- provided that everything's as clear as possible. The due date, discount for early payments, and whether you accept credit cards or online payments, among other details, is all information that they need to know. If things are clearly outlined, then you'll be unlikely to need to remind customers about your net payment terms; it'll all be there for them to see.
Also, don't forget that your customers may well be business owners too. They won't be asking 'what are payment terms' when you outline your terms. They'll already be fully familiar with the common invoice payment terms and how making an early payment will help you, and will appreciate it if you make as many payment methods as possible available to them.
It looks professional
While not one of the primary advantages, establishing your payment terms can help to enhance the perception of your brand. It shows that you're a serious, professional business that works with established structures.
Legal advantages
Having clearly defined payment terms may offer a degree of legal protection. In the UK, there are laws relating to late payments. If you offer net 30 terms, and the business takes longer to pay, you may be legally entitled to charge interest and other late fees. If there's ever a dispute, you'll also have a document that can serve as evidence in your favour. Note that your legal standing may vary from one country to the next, which is something to keep in mind if you engage in international trade.
Reduce stress
You don't need us to tell you how difficult it is to run a business. By taking the time to create payment terms and integrate it into your accounting software, you can minimise the impact of one of the more challenging aspects of running a business. Plus, whether you decide on a PIA payment, CBS cash, net 30, or line of credit structure, you'll have peace of mind in knowing that you've identified the correct approach for your organisation.
Optimise your payment terms
If you're interested in learning more about how Chaser can help you overcome the cash flow challenges of late payment, speak to an expert today.
Payment terms FAQ
Q. What are payment terms?
Payment terms are set by a business and outline when the customer must pay for the goods or services they receive. It outlines the due date of the payment, whether any payment discount will apply for early payment, and the payment methods that the business accepts; for example, digital payments, bank transfers, or cash.
Q. What to include in payment terms?
Every businesses' payment terms are unique to them. You can include when payment is due -- cash next delivery, cash in advance, net 30 (30 days) -- and the payment methods you accept. If appropriate, you can include a payment discount or partial discount on future odds if the customer pays early.
Q. How do payment terms improve cash flow?
Payment terms help improve cash flow by increasing the likelihood of being paid on time. Informing the customer that they have net 30 days to make the payment or that payment is due cash next delivery allows you to get paid on your terms. Payment terms are flexible and can account for the unique needs of your business and customers, allowing you to include an order partial payment discount, monthly credit payment information, or any accumulation discounts that apply. Ultimately, they make it more likely that each of your customers will pay up on time.
