Understanding Invoice Payment Terms and Conditions

No one likes fine print – not even those who have to write it. Invoice payment terms and conditions are particularly problematic, especially for small businesses trying to set them up for the first time. Unfortunately, they’re vital in ensuring that your clients understand your payment terms and schedule and that you get paid on time.

So to make sure your bottom line doesn’t suffer, we’ve created this article about understanding invoice payment terms. On top of all the necessary explanations, you’ll also find invoice payment term examples below, which you can customize to your company’s unique needs.

And now, without further ado, let’s jump right in. 

Key Takeaways

• Understand Common Terms: Familiarize yourself with terms like Net 30, EOM, and PIA to set clear expectations and manage cash flow effectively.
• Set Industry-Standard Terms: Align your payment terms with industry norms, such as Net 60 in construction, to facilitate smoother transactions.
• Evaluate Client Reliability: Review the payment history of clients to choose appropriate terms, reducing the risk of late payments.
• Incorporate Discounts for Early Payments: Offer incentives like 1% discount for early payments to encourage prompt settlements.
• Include Late Fees: Clearly state late fees to motivate timely payments and protect your cash flow.

The Evolution of Invoice Payment Terms

But first, a little history lesson. In the olden days, companies used to physically mail their clients copies of their recurring invoices at the end of each month and give them a couple of weeks to finalize payments. And while this approach is still viable today, it’s painfully slow.

On top of the payment process, it takes time for the physical invoice to be delivered. Then, you need to consider that some customers will want to send you a cheque back instead of a wire transfer or an online payment. And that’s assuming neither of these documents gets lost in the mail.

Thankfully, we have better ways of doing this nowadays. Online invoice templates let you create and generate custom invoice terms and conditions for each customer. Then, all you need to do is send the finished document electronically.

You can also set up options for instant online or card payments to make the process even faster. For even better results, you can include an option that will automatically share a PDF version of the invoice terms and conditions if the customer pleases. 

Ultimately, that’ll allow you to get paid faster, prevent anything from getting lost on the way, and even help you cut down on your paper waste.

Most important payment terms and conditions for invoices

Individual invoice payment terms and conditions are categorized by universally recognized codes. There are dozens to consider, but for the purposes of this article, we’ll outline the ones most helpful and commonly used by businesses of all sizes.

The invoice payment terms and conditions you should consider include:

• 15 MFI: Abbreviation for “Month Following invoice”, this means you expect the customer to pay their dues by the 15th of the month following the invoice issue date.
• 30 MFI: Abbreviation for “Month Following invoice”, you expect the customer to pay their dues by the 30th of the month following the invoice issue date.
• Cash Account – No Credit: You expect the customer to make all their payments in cash, and you won’t be offering any credit.
• Cash Account – Letter of Credit: You expect the customer to make their payments in cash but will accept credit confirmed by a bank.
• Upon Receipt: You expect the customer to pay immediately after receiving your invoice.
• EOM: Abbreviation for “End of Month”, you expect the customer to pay by the end of the month after receiving your invoice.
• Net 7: You expect the customer to pay 7 days after the invoice date.
• Net 10: You expect the customer to pay 10 days after the invoice date.
• Net 30: You expect the customer to pay 30 days after the invoice date.
• Net 60: You expect the customer to pay 60 days after the invoice date.
• Net 90: You expect the customer to pay 90 days after the invoice date.
• PIA: Abbreviation for “Payment in Advance”, you expect the customer to pay their dues upfront before you start working on the project / deliver the products.
• CIA: Abbreviation for “Cash in Advance”, you expect the customer to pay their dues upfront before you start working on the project / deliver the products by cash.
• 50% Upfront: You expect the customer to pay 50% of the total price upfront before you start working. It’s very common for long-term projects.
  
• CWO: Abbreviations for “Cash with Order”, you expect the customer to pay when ordering from you before you start working on the project / delivering the products.
• RD: Abbreviation for “Rolling Deposit”, means the customer can pay for your services with a limited credit you offer them by supplying a deposit receipt. Essentially, this works like a pre-paid secure card.
• CBS: Abbreviation for “Cash Before Shipment”, means you expect to take a down payment before shipping products / services to offset costs and get more security.
• CND: Abbreviation for “Cash Before Delivery”, means you expect to take a down payment before delivering products / services to offset costs and get more security.
• COD: Abbreviation for “Cash on Delivery”, means that the customer only has to pay after receiving the promised products / services. In this case, the risk is on the provider’s side. If something goes wrong, the customer may decide not to pay.
• CONTRA: Also known as a “Contra Payment”, is used when two companies that owe each other do business. A portion of the payment is provided for by services / products, and the remainder is paid.
• Stage Payment: Also known as “Process Payment”, this is used for long-term projects. Payments are scheduled according to milestones specified ahead of time and only paid after each is met and confirmed. It’s also common for penalties to be applied if milestone delivery dates are delayed.

Depending on your business, you might be able to get away with creating general invoice terms and conditions that apply to all your clients. However, creating individual T&Cs for each customer can be worthwhile to make your cooperation as smooth as possible.  

Remember to always communicate your company’s payment terms and conditions clearly. Especially when starting a completely new project or making changes to the payment requirements of a returning customer. Doing so will prevent misunderstandings, help build a better professional relationship, and get you paid on time.

To expedite customer payments, implement professional payment reminders as part of your invoicing process.

What are invoice payment terms?

Invoice payment terms are the conditions set by a seller for how and when a buyer is to pay for the goods or services provided. These terms are usually specified on the invoice and include details like the amount of time a buyer has to pay the invoice (e.g., within 30 days), any discounts for early payment, and penalties for late payment.

The purpose of these terms is to clearly communicate the payment expectations between the seller and the buyer, helping to manage cash flow and reduce financial risk. For example, a business might use terms like “Net 30” to indicate that full payment is due 30 days from the invoice date. Alternatively, terms like “2/10 Net 30” offer a discount (2% in this case) for early payment (within 10 days), while still requiring full payment within 30 days.

Invoice payment terms are an essential part of business transactions, ensuring that there is a clear understanding of when payment is expected, which can help businesses plan their finances and maintain a steady cash flow.

What are standard payment terms?

Standard payment terms are predefined guidelines that specify the expected duration within which customers should settle their payments. These terms can vary based on several factors including geographical location of the business, customary practices within a specific industry, and the credit terms a business is willing to extend to its customers.

In the United Kingdom, it is customary for businesses to adopt a 30-day payment term from the date of invoice issuance. In contrast, businesses in Scandinavian countries often operate with a shorter payment window, typically 14 days. Industry-specific norms also influence payment terms; for instance, in the construction sector, it is more common to encounter payment terms extending to 60 or 90 days from the invoice date.

How different Invoice Payment Terms help your Business

Most companies just starting out think there’s only one payment process to worry about – delivering the promised services or products and getting paid. But in reality, there are several variations, each best fit for a different use case.

In this section, we’ll go further in-depth on some of the invoice terms and conditions we outlined in the previous part of the article.

1. Split Payments

If you routinely deal with expensive services, luxury items, or big-ticket sales for your business, you should offer split payment options on your invoice terms and conditions. The strongest asset in your business is your cash flow. Requesting full payment for expensive services or items could put your clients or potential clients off. 

It’s important to have an effective accounts management system in place if you plan on accepting split payments from your clients. However, Billdu can help you accomplish this, and your business can grow because of it.

2. Cash Before Shipment (CBS) & Cash Before Delivery (CBD)

Shipping products can be a risky business, especially if you make long-distance deliveries. Your products might get lost in the post or be damaged. If you don’t take precautions and the customer doesn’t pay, this can be a net loss for your business.  

By including a CBS or CBD term in your invoice, you can protect your bottom line by demanding a down payment before the products are shipped. That way, even if something goes wrong, you’ll be able to recoup some of your losses and avoid any significant damage to your company’s finances.

3. Letter of Credit (LOC)

Customers greatly value companies that offer them credit. This is especially common in the B2B sector, where you may have recurrent purchases from the same clients every few weeks/months. But how can you offer this privilege to customers you’ve not worked with in the past and have no professional experience?

That’s where LOC can help. This term requires customers to get approval for financing from their bank. If the delivery goes through as promised and they don’t have the money to pay, the bank will cover the charges and be reimbursed at a later date. And if something goes wrong, no one has to pay anything. 

However, since banks are a disinterested 3rd party in this business relationship, they want to cover their bases. This means going through a lot of documentation to specify requirements and conditions before they’re willing to send you a cent. 

4. Rolling Deposit (RD)

RD is another frequent payment process in the B2B sector. If you’re unsure about a customer’s reliability, you can oversee their payments by having them supply a deposit receipt, which acts as a pre-paid secure card they can draw on to purchase from you. 

This allows them to make purchases without having to worry about frequent payments and you to build a more trusting relationship with them before offering any additional credit. 

5. 50% Upfront

Asking for a 50% upfront payment may seem concerning to some customers, but it helps significantly smooth over long-term projects. You can cover associated costs without spending out of your pocket by receiving a portion of the total price ahead of time. 

Furthermore, it allows clients to break up more expensive payments into smaller, more manageable parts. Last but not least, it can be an excellent middle ground to take should your customers feel uncomfortable paying upfront for your services in full.

6. Net 30 & Net 60

“Net 30” or “Net 60” can be confusing to see in an simple invoicing template for customers and new businesses alike. In reality, it means nothing more than that your clients have up to 30 or 60 days after receiving an invoice to finalize payments. Thankfully, you can swap these terms out for “30 days” and “60 days” on your invoices to prevent any confusion and potential late payments, though we still recommend you include a specific due date as well.

If you’re wondering whether you should use Net 30 or Net 60, consider the following. Net 30 is frequently used in all sectors, including both B2C and B2B. Meanwhile, Net 60 can be most often found in the fashion and construction industries.

7. Discounts

If you want your customers to pay you faster, you may want to consider a discount system. For example, you could offer a 1% discount if clients make the full payment within 7 days of the receipt date, or you could have a 2% discount if they pay the next day. It’ll save them a little bit of money and you a little bit of grey hair. 

However, If you plan to include a discount system, you want it to stand out on your invoice terms and conditions. So it’s good practice to highlight it in bold or color to make it jump out on your invoice.

Why you should use Invoice Terms and Conditions

Your invoice payment terms and conditions act as a basic contract between your company and the customer. In the B2C sector, these are often intuitively enforced by your store’s or e-shop’s set-up (i.e., payment gates, registers, etc.) and common sense. Some outliers apply, like return policies, but that’s about the extent of it.

However, B2B works differently. You often work on projects and deliveries with customers individually, and your needs and requirements may change depending on the industry. Consequently, you need to consider aspects of your collaboration and stipulate in legal language to ensure expectations are met and no harm comes to either party.

Invoice Terms & Conditions use cases to consider:

• Payment Times & Late Payments
  Depending on your industry, you may need to cover costs, ask for upfront payments, etc. Even if your terms don’t stray from the standard, you need to state them to make them legally binding clearly. Therefore, you must specify what amount you expect when and what happens when the customer fails to deliver their payment in the agreed time frame.
• Currencies & Payment Forms
  If you do business internationally, you’ll invariably have to deal with different currencies. If the conversion rate is bad, you may end up getting paid less than what you were promised. Therefore, it’s important to state which ones you accept and which ones you don’t. Similarly, different forms of payment come with their own benefits and drawbacks. Do you take cheque, card, wire transfer, cash, or everything? The customer needs to know.
  

Invoice Delivery
Let’s discuss your customers’ terms for a change. Thanks to Google Doc templates and online invoice systems like Billdu, you can create professional and engaging invoices quickly and easily on any smart device. However, some companies may only accept physical invoices up to a specific month’s date. To avoid letting your invoice fall through and waiting for a long time, clear up these expectations ahead of time.

Invoice Payment Terms Best practices for Freelancing

Getting started with freelancing can be particularly hard for people with no previous experience. So, to help you avoid any potential trouble, we’ve compiled a few quick tips you can immediately incorporate into your business processes.

• Ask for Upfront Payments:
  Everyone’s heard the horror stories of freelancers getting taken advantage of. To ensure you don’t become a part of another such story, ask for down payments ahead of time. The rest of your payments should be escrow-style until you complete the work.
  
  Depending on how well you know the clients, you could offer Net 30, Net 60, or full fee upfront invoice payment terms. In any case, you want to follow industry standards to avoid complications with your clients.
  

• Make Individual T&Cs for Each Client
  When you set up your Word invoice template, there are other important factors to remember. No blanket solution will work with all of your clients.
  
  Even inside specific industries, you could end up with a client who gives you immediate payments as soon as they get the invoice, but another client could require you to offer Net 60 terms. It’s on you as a freelancer to work out payment terms that suit your business and the clients.
  

• Offer Benefits for Keeping to Your T&Cs
  Certain elements affect how long it takes for your clients to pay you. Smaller payments can be made quickly, but larger ones can take a while due to limited resources. However, like your customers, you depend on your company’s cash flow to make ends meet.
  
  To smooth things over for both sides, consider incorporating Prompt Payment Discounts (PPD). Depending on how quickly customers pay you, you can offer small discounts on your prices (typically 1% – 3%). It’s not too big of a loss for you, but it’ll help the client save a bit of money and can serve as a great motivation.
  

Explore your possibilities by breaking down desirable outcomes in an Excel invoice template and assign them discounts as you see fit. From there, you can incorporate them into your business processes easily and monitor them with invoicing systems like Billdu. Tracking invoices and payments has never been easier.

Pro tip: To understand the differences between invoicing and billing, check out our top article.

Start Your Free Billdu Trial and Work Out Your Invoice Terms and Conditions

And that covers the basics of everything you need to know about Invoice Payment Terms & Conditions. If you’re a business owner and you want to learn a new way to track and create custom invoices for your clients, try Billdu’s software with a free trial. 

You can easily add your logo, input your payment terms, add discounts, offer different payment options, and track dozens of invoices from one centralized dashboard. Choose from a host of templates to help you create your invoices, send them out and get money flowing back into your business.