What are Invoice Payment Terms?
Most businesses have experienced late payments. It’s an unpleasant situation that can have a big impact on your cash flow. Whether the invoice was simply overlooked, or the customer regularly pays late, there are ways you can ensure timely payments.
Payment terms are entered on invoices to inform the customer of how and when the payment should be made. They can also include discounts, late fees, and any other special conditions of the sale.
This article explains the benefits of including payment terms on your invoices, and some examples of invoice payment terms and late fees.Start invoicing for free
There are dozens of payment terms that you can apply to your invoices. A few of the most common ones are listed below.
Net 30 means that the full payment is due within 30 days of the invoice issue date. This can also be represented as Net 15, Net 60, etc.
C.O.D. stands for “cash on delivery”, and is also known as “payable on receipt”. This means that the payment is due once the products are delivered, instead of before the products are shipped.
C.I.A. stands for “cash in advance”. This means that the payment is due before the shipment is delivered.
E.O.M. stands for “end of month”. The payment is due before the end of the calendar month.
This represents a cash discount of 2% if the payment is made within 10 days of the invoice date. Otherwise, the full amount is due within 30 days of the invoice date. It's up to the business to determine how much of a cash discount they're willing to provide.
For example, if a business entered “5% 7 / Net 30”, the customer would apply a 5% discount to the invoice total if paid within 7 days of the invoice issue date. If the invoice total was $100, then the customer could pay $95 within the first 7 days, or $100 between day 8 and 30.
If the customer takes advantage of the cash discount, the business would then mark the $5 as an expense. Offering small cash discounts is a great way to entice your customers to pay quickly.
If late payments are a problem for your business, you might consider applying late fees to your invoice payment terms. You can decide if you want to do this for all of your sales or only for specific customers.
In general, small businesses should evaluate each situation and consider a fair policy on late fees. In some cases, this might affect the relationship you have with your client, but charging late fees is standard practice.
Keep in mind that you’ll want to charge enough that the customer will act, but not too much that makes your business seem greedy or is over the legal limit.
The maximum legal amounts are set at a state level. Before you start charging late fees, make sure to check your state's government website to ensure you’re within your legal rights.
It's important to note that if your business decides to charge late fees, these need to be clearly stated on the invoice or contract. You can't retrospectively add a late fee after the invoice has already been issued. Your customer should be aware of the fee, which will ultimately convince them to pay on time.
Below, you’ll see a sample invoice with payment terms created using SumUp Invoices, a free invoicing software. The payment terms are set as “Net 30” which is also reflected in the due date. Discount information and the method of payment are also clearly stated.
Adding detailed payment terms on your invoices provide several benefits to your business, such as:
Avoid misunderstandings and back-and-forth communication
Receive payment quicker
Control your cash flow
Help you with any invoice disputes
Receive late fees if the payment is overdue
Receive payment in your preferred method
As long as your payment terms are clear and within the law, there are no downsides to invoice payment terms.
Looking for a simple way to create free, professional invoices? With SumUp Invoices, you can create and issue an invoice in less than 1 minute.
Enter your own custom payment terms or choose to save them as default so they’ll automatically be applied to all future invoices. You can also choose to include an online payment link so your customers can pay quickly online, or you can enter your bank details for bank transfers.Start invoicing for free