10.1.2021

Invoice Payment Terms: What They Mean and How to Apply Them

Written by Aine Hendron

goals

Payment terms are rules and conditions surrounding how buyers will make payments during the sale of goods or services. The seller will often set the terms of the sale to the buyer. Invoice payment terms indicate when and how the buyer would like to receive payment. 

Payment terms can also refer to the terminology used when discussing invoices. This guide explores some of the common payment terms that appear on invoices, what payment terms are, and how enforcing them will benefit your business financially.

What payment terms can include

Most companies will set payment terms to ensure they’re paid on time, in a way that works best for their business. It’s important to make these terms clear to customers, and they should be displayed on every single invoice that you issue. When a customer buys something from you, they enter a contract to oblige to your payment terms or face some consequences. 

As the seller, you can lay out exactly how and when payment is expected. 

How much you expect to be paid

  • State the total amount payable including VAT and any surcharges.

When you expect to be paid

  • Whether you’d prefer payment in advance, upon receipt of the products or services, or sometime after. 
  • Include the exact date as well, even if you have already stated you expect payment by EOM. 
  • If you accept payment in installments, include the number of installments you expect, the exact amount of money you expect to receive with each installment, and the dates that each installment is due. 

The currency you wish to be paid in

  • List the currencies or cryptocurrencies you accept. 
  • If you accept international payments, be sure to include your IBAN.

Payment methods

  • Along with your payment details, you must clarify how customers should pay you. 
  • For example, debit or credit card, bank transfer, pay-by-link, cheque, or cash. 

Payment conditions

  • List any discounts for early payments, or for people working within a certain trade or industry. 
  • Clearly warn customers of the penalties for late or missed payments.
  • State the exact fee or interest rate for late payments.

Payment terminology 101

Your invoice will detail quite a lot of information. For the sake of convenience, you might want to state your terms using some commonly-known acronyms and abbreviations. The following abbreviations relate to the payment deadline. 

  1. PIA: Payment in advance.
  2. Bill of exchange: A promise to pay at a later date, usually supported by a bank.
  3. Net X: Payment is due by a set amount of days after the invoice date. ‘X’ will replace the number of days. For example, Net 7, the due date is 7 days after the invoice date.
  4. EOM: End of month.
  5. 21 MFI: 21st day of the month following invoice issue. 
  6. CBS: Cash before shipment.
  7. CWO: Cash with order.
  8. Contra: Payment from the customer offset against the value of supplies purchased from the customer.
  9. Letter of credit: A documentary credit confirmed by a bank, often used for export.
  10. Stage payment: Payment of agreed amounts at stage.

Discounts and returns

The following invoice payment terms relate to refunds and discounts for early payment. 

  1. X% 10 Net 30: X% discount if payment is received within ten days. Otherwise, payment is due at regular price 30 days after the invoice date.
  2. Trade-in credit: A discount when you return something to the company. For example, if you receive a discount on a new mobile phone when you turn in your old one. 
  3. Partial payment discount: When a seller needs cash flow, he may offer a partial discount. 
  4. Prompt payment discount: The wholesaler or manufacturer gives a discount to the retailer at the list price or catalogue price. This sometimes applies to promotions.
  5. Rebates:  A refund mailed to the purchaser after a purchase [1].

On the other hand, you might want to avoid using acronyms when setting your own terms. By stating in full sentences exactly when you expect customers to pay the invoice and your preferred payment method, you mitigate the risk of late or missed payments. 

How to make sure you get paid on time

As the service or goods provider, you need to make sure that you are receiving a fair payment for what you do. 

Late payments can have a negative effect on your cash flow, which directly impacts your ability to operate as efficiently as possible, and pay your own bills on time. Implement the following strategies to get paid quicker. 

Make your terms crystal clear in advance

Cut the back and forth by explicitly declaring your terms verbally and in writing to your client. This way, customers have a clear understanding of your expectations before entering into a contract with you. By making your invoice easy to understand, you prevent any misunderstandings that could result in an unpaid bill. 

Automate invoicing using software

You can create invoices using your POS or accounting software. These often include templates with suggested terms for the most effective invoicing. With online invoices, customers can often pay by clicking a link that will prompt them to enter payment details. Some accounting software even sends you an update when the invoice has been opened. Find a platform that sends reminders to both the buyer and the seller about the approaching due date if an invoice remains unpaid.

Blacklist repeat offenders

If a client continually pays you late, they may be more of a liability to you than an asset. Periodically offboarding late-paying customers gives you more time to focus on your most value-adding customers, which will benefit your business in the long term [2].

Simplify business management with a reliable POS system

Financial management is a huge part of running a business, but it doesn’t have to be stressful and time-consuming. By choosing the right financial software for your small business, you can turn your attention to other areas of your business, like operational efficiency and taking care of your customers. 

Let your point of sale (POS) system handle reviewing sales, bookkeeping, and accounting tasks. Epos Now offers state-of-the-art POS systems for businesses in various industries. We let you choose the tools and insights to help make your business achieve its goals. You can do everything from process transactions and print receipts to take inventory and manage staff. 

With Epos Now, you can also:

  • Create and send invoices using simple templates and a built-in VAT calculator
  • Receive and pay ongoing invoices automatically
  • Review profitability reports based on individual product performance, trending items, best and worst sellers, and employee sales
  • View sales analyses on profit margin, cash flow, and other expenses
  • Access multi-award-winning inventory management systems that sync online sales and in-person sales for the most up-to-date stock levels
  • Automate stock purchasing, so you never miss a sales opportunity
  • Save customer contact details and shopping preferences for more targeted marketing on our CRM system
  • Integrate with the business automation apps that are right for your business
  • Simplify employee management for more efficient scheduling and payroll

Request a free call back from one of our experts today.

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