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How Do I Know What Invoice Terms To Use?

Man doing research at a desk

It’s not always straightforward to know when to invoice your clients. If you’ve ever dealt with multiple suppliers, you’ve probably noticed that they use a variety of payment terms.

Whether they use 7 days, 14 days, 20 days, 30 days, or end of month, there is no right or wrong answer for when they want to be paid.

The same can be said for your business, which can make it seem impossible to set your own payment terms. So let’s start at the beginning.

What are invoice terms?

Your invoice terms specify how and when your clients should pay you. This is split into four main sections:

  1. Which payment methods you accept
  2. Which currency you accept
  3. When should the payment be received by
  4. Any late fees if the payment is not received on time

If your client is unclear on any of these items, it can delay payment and leave your cash flow floundering.

Common payment terms you might see on an invoice

As a business, you may or may not have seen some of these from your suppliers. However, unless you’ve come across them before, you might not know they exist, or when you could be using them on your invoices.

  • Cash in advance (CIA) - full payment is required before any goods or services are produced. This is a good way to mitigate the risk associated with high-value transactions.
  • Cash on delivery (COD) - also known as payment on receipt. The client is expected to pay upon receipt of their goods.
  • End of Month (EOM) - payment is due on the last day of the month in which the invoice was issued. While this can work well, it can also leave the business cash-poor throughout the month as all payments happen on the same day. However, some businesses prefer the predictability of the payment schedule.
  • Net 7/10/14/30/60/90 - “Net” is the number of days you expect payment in, for example, Net 7 means payment in 7 days from the invoice date. The longer the Net, the more careful you should be with the relationship, as you have to wait longer for your money.
  • Contra payment - typically used if you have an exchange of services between two different businesses. For example, rather than Business A paying Business B £100 for services, followed by Business B paying Business A £100 for products, they may make a contra-payment to offset the value.

How to choose payment terms that work for your business

There are two main thought processes business owners go through when choosing their payment terms: either “this is easy, I know exactly how to set them” or “I have no idea where to start”.

Whether you set up your payment terms but think they could use some tweaking, or if you have no idea where to start, consider the following.

Cash flow needs

There might be times in the month when your cash flow dips, or there may be points in an ongoing project that need a cash injection to be completed.

Both of these can be mitigated in your payment terms. For example, you can decrease your Net payment terms so you are paid faster after completing jobs. Alternatively, if you’re completing a long-term project, you can request payment upfront or offer staged payments.

Both of these options can increase your cash flow when you need it.

Think about the industry standard

If your client often interacts with businesses in your industry, they may come to expect and trust certain terms. If your business offers terms that differ from these, you may lose client trust.

If you’re unsure of the industry standard, it may be worth researching it.

Adjust based on what you know

Even the best laid plans can fall apart at no fault of your own. When dealing with clients who are attempting to manage their own cash flow, you might find that payment arrives late or that you have to chase them for what you’re owed.

While no one wants clients like these, you can use them to adjust your payment terms. For example, you can request payment upfront from these clients, thereby mitigating the risk to your business.

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