Deciphering Invoice Payment Terms: Everything You Need to Know

By Vladana Donevski

June 17, 2023

With invoices and bills, being on the giving end is undoubtedly the better of the two options. However, issuing invoices means being responsible for ensuring they are professional, contain all the necessary information, and have proper invoice payment terms included.

Everybody knows that providing the service or selling the goods isn’t the trickiest part of running a business – it’s getting paid for it, especially for companies that have just started with their operations. No business can thrive on a bunch of “I owe you one,” so it’s vital to get those unpaid invoices paid on time and be liquid enough to at least keep the company afloat.  

The first step in that direction would be to send invoices with payment terms. These terms are an essential part of every invoice, as it is crucial to establish upfront when the payment would be due and even to incorporate late fees. There are several terms for you to consider and adopt when issuing invoices. 

Considering that these terms should be set up together with a contract, let’s discuss them in more detail so that you know what they are, how to use them, and how to pick the right ones for your business.

What Are Payment Terms?

Just like the name suggests, payment terms clearly define the terms under which you wish to get paid. The terms include the means and the time of payment, and they should be specified during the negotiations with potential customers, included in the contract, and clearly outlined in each invoice you send. 

Here is what you should include in every invoice to ensure your payment terms are coming through to your customers.

Payment Timeframe 

When do you expect to be paid? Here are some common types of payments terms to use for defining the payment timeframe:

PIA Payment – expected in advance for a full amountUpon Receipt Payment – expected immediately upon invoice receiptNet 7/21/30 Payment – expected in installments seven, 21, and 30 days from the invoice dateEOM Payment – expected at the end of the same monthEOMPayment expected at the end of the same month2/10 Net 30 Payment – expected in 30 days, with 2% discount if paid within 10 days15 MFI Payment – expected on 15th of the month following invoice

Net 30 is among the most common standard invoice payment terms you can specify. However, you can also use other types if they suit your business better. Sometimes, immediate payment is the best solution. PIA (Payment in Advance) is better for companies with upfront payments to make even before they start working on a project, and 2/10 Net 30 is handy as an incentive for companies to pay up in a short timeframe. Adding invoice due date to ensure that the accounts payable clerk from the invoiced company knows when to make the payment is also good practice.

Preferred Currency

If your company is working internationally, it must include the section defining preferred currency. 

Payment Method

Payment method is one of the essential terms on an invoice, as you need to let your clients know how they can pay you. It could be a bank transfer, debit or credit card, or mobile payment. Including account details necessary to perform a transaction and the money landing in your checking account is a must.

Additional Conditions

If you have any additional conditions that you have agreed on with your customers, such as discounts for early payment or late fees, these should also be included in the terms, contract, and invoices.

Why Are Invoice Payment Terms Important?

Setting invoice terms upfront and including them in your invoices is crucial for your business’s optimal performance. If you have provided goods or services, you should know when you can expect to get paid to plan how to go forward with your business and your budget. 

According to Atradius’s 2020 report, 43% of invoices issued in the US, Canada, and Mexico, were unpaid by their due date, while the digital advertising industry report for 2013, conducted by FastPay, showed that only 6% of invoices were paid in under 30 days. Now, for small businesses, that’s a lot of money that can’t be put to further use. Any late invoice payment can hinder your company’s growth and profitability. 

Clearly defining when you want your customers to pay you during negotiations, including the terms in the contract and each consequent invoice, is the first step to ensure that you’ll be paid on time. You can also give discounts for prompt payments or use late fees to emphasize the importance of timely payments to your customers.

What Are the Best Practices?

For those starting their business or experiencing problems with late payments from their customers, there are some practices you can adopt to help solve these issues by implementing the right invoice terms and conditions. 

New businesses often underestimate the time and effort it takes to create quality invoices and chase payments. This can be a time-consuming and error-prone process. Ensuring that you dedicate enough time or assign the right person to the task of establishing a foolproof invoicing system is fundamental. Ultimately, you can also outsource these and other bookkeeping tasks to an online bookkeeping service. 

From there on, establishing your terms early on is crucial. You know the dynamics of your business and how fast the payments should be. Approximately 75% of invoices ask for payment within two weeks, so don’t hesitate to set short payment terms and conditions for an invoice.

Send your invoices as early as possible, though, so that you can expect prompt payments. Have reminders set in place, even before the due date, as not everyone will be quick with their payments without being reminded about it first. Late fees are not uncommon either or picking up the phone to ask for late payments. It’s a dull and tedious process, but you can’t live on promises. 

Unfortunately, in extreme circumstances, you might also need to take legal action to get those invoices paid in time. It is an excellent idea to have an online legal counsel to contact for legal advice. 

There are always some incentives you could offer, too. Setting up discounts for prompt payment within the terms of payment is always a good idea, and while you might receive less, the money will be in your account faster so you can put it to good use.

Could Invoicing Software Help?

An impressive amount of invoicing software is available on the internet. It can effectively automate a significant part of handling invoices and payment terms as it enables you to create invoices with a click, set automatic reminders, and much more.

Overall, some of the best software you could use to help you handle your books and invoices are Quickbooks, Safebooks, Zoho Books, among others. Each of these will save you a ton of time and, on some occasions, money, too.

What Are Payment Terms on an Invoice?

If you haven’t handled invoices before, you’ll likely struggle to find or add a particular piece of  information in one. While there is software that can generate invoices for you, assistant services if you prefer it handled by an experienced personnel, and plenty of readily available templates, it can be stressful if you don’t know what you are looking for in the first place.

The safe bet is usually to check for the due date. This is always included in all the templates under invoice details, together with an invoice number and invoice date. Here, you will usually find payment terms on an invoice.