The 14 Most Relevant Invoicing Terms You Must Know

Whether you’re a freelancer or a multi-million dollar business, Without the correct payment and invoicing terms, you will end up getting short-changed a lot of the time. Invoices can drive you up the wall. You simply won’t get paid without sending out timely invoices. You need to make sure invoices are consistent, professional, and most importantly, being sent on time.

Getting your payments on time is the key to managing cash flows on which the very survival of your business depends. Understanding which invoicing terms and conditions you need to include in your invoices is the key to building a payment system that works for you and your business.

Common Invoicing Terms:

Terms of Sale

The terms of sale cover all the payment terms and conditions you have agreed to with the buyer. These terms include things like the amount, the cost per unit, delivery, payment method, discount if any, when the payment is due, and so on.

These terms of sale are all part of the invoice. It’s very important to define the terms of sale at the very outset so that the expectations are set clearly and there is no room for misunderstandings at a later date.

When both parties know exactly what is expected of them and when there will be far fewer disagreements.

Terms of sale become even more significant when the transaction is an international one because then it includes things like time of shipping, payment of international duties, and any other terms that are subject to the international chamber of commerce regulations.

Immediate Payment

Immediate payment is one of the most commonly used invoice payment terms.

It’s a fairly simple concept which means that the payment is due at the time that the product or service is delivered, and not any time sooner or later.

Under immediate payment, if a customer doesn’t make the payment immediately, the seller has the right to reposes the goods that have been sold.

While this is a great model for B2C (Business to Customer) businesses, it doesn’t always work as well for B2B (Business to Business) companies because clients are afraid that immediate payment will place an undue burden on their cash flows.

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Payment in Advance

PIA (Payment in Advance) is simply a payment that is made before the delivery of the product or service.

In other words, it’s a payment made ahead of schedule. Many businesses require advance payments for their products and services.

This could be for a number of reasons including protecting themselves against non-payments. This is especially important when sellers are working with a new customer.

Freelancers like writers, graphic designers, website developers, etc. often require advance payments (usually 50%) when working with a customer for the first time. It could also be for covering out-of-pocket expenses that need to be made in the course of the project. For instance, a website developer may need to purchase hosting or a WordPress theme.

Net 7, 10, 30, 60, 90

This is a commonly used term in invoicing that indicates when the payment is due. In most cases, the payment is not made immediately upon delivery of the product or service but sometime later.

Net 7, for example, indicates that the payment is due 7 days after the invoice date. So if the invoice was dated June 26, payment would be due on 2nd July. Similarly, Net 30 indicates that payment is due 30 days after the invoice date and so on.

However, many companies don’t use this term anymore because it ends up confusing both the client and the accounts payable team.

Using a more clear, unambiguous term like Days instead of Net is a better way to go. Clear sentences like “Please make payment within 7 days” might be the best way of avoiding any scope for misunderstanding.

Early Payment Discounting

Cash flow is often the key to running a successful business. That’s why a number of companies offer client discounts for paying before the due date.

This is usually indicated in the invoice with a term like 2/5 Net 20. This means that the payment is due 20 days after the invoice date but there will be a 2% discount for the client if they make the payment within 5 days.

While coming up with early payment discounting options, it’s important to offer a discount that your business can afford in exchange for a better cash flow situation.

Once again while terms like 2/5 Net 20 are standard practice, it might be best to mention your offer explicitly to avoid confusion. Something like “Please pay within 5 days to save 2 percent” works perfectly well.

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Recurring Invoice

Recurring invoices are for ongoing services. They are typically billed monthly and the amount usually stays the same every month. These can be for anything from content writing services to hosting to accounting software.

A lot of companies try to have as many recurring invoices as possible. It is a great way to build predictability and consistency in your revenue stream. Most SaaS (Software as a Service) companies have monthly subscription plans for this reason.

With good invoicing software, you can actually automate sending invoices every month. You can even request customers to automate the payment process so that the amount automatically gets deducted from their account and comes to you on a monthly basis.

Line of Credit Pay

Line of credit basically allows clients to settle bills on a monthly or quarterly basis instead of having to pay immediately or soon after delivery of the product.

In other words, it basically means allowing a customer to purchase the product on credit. The amount of money that can be owed usually has a preset limit and the client is not allowed to exceed that amount.

This is usually used among larger companies when the client is a well-established brand with solid credentials.

With small and medium enterprises the risk of default is simply too high and the hit to cash flows is often not sustainable. It’s important to make the terms of the line of credit clear before the first transaction is complete so that there is no scope for confusion later.

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Quotes and Estimates

Quotes and estimates are presented to the client before they even decide to use your services. The figure is an approximation which allows the client to compare prices between different vendors and make a final decision.

It is not necessarily the final price but it is usually close. It also contains things like an itemized breakdown of how the price is arrived at and a timeline of estimated delivery of the product or service.

If the customer does decide to do business with you, it’s not difficult to convert the quote or estimate into a final invoice. Invoicing software helps you automate the process.

Interest Invoice

One of the biggest risks while doing business is delayed payments. They can mess up your cash flow situation to a large extent and may even curtail the growth of your business in the process.

But sometimes a client may be unable to pay on time due to an unavoidable situations. So what can you do to penalize such behavior and make sure it doesn’t happen in the future. One of the answers is to charge interest or late fees on the invoice.

It’s important to remember of course that the interest is only charged for the duration for which the payment has been delayed.

An interest invoice is sent separately to remind the client of the due payment, the interest charges, and the date by which they need to settle the payment.

You can send the invoice every month that the payment is delayed with a new interest calculation to reflect the additional delay.

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Invoice Factoring

This is one of the best solutions for companies who are in need of cash and whose invoices haven’t been paid yet. In exchange for a fee, invoice factoring companies can give you as much as 85% of the invoice amount up front. Keep in mind that the fee can sometimes be quite steep. For instance, companies like BlueVine charge 0.5% per week.

Some invoice factoring companies also allow clients to keep making payments under your business’ name. Many times, small and medium enterprises sell products to larger, well-established companies who have long payment cycles. Invoice factoring is a great option in such a case because invoice factoring companies are more likely to accept invoices from big, profitable companies that are unlikely to default.

Bill of Exchange

Bill of exchange is a document that carries an unconditional order to pay a specified sum of money to a particular person or to the instrument holder.

The bill of exchange can either be payable on demand or after a period of time. When you sell goods on credit to the client, you can create a bill of exchange and send it to the client for acceptance.

The bill contains details like maturity date, amount, signatures, name and address of both parties and so on.

Contra

Sometimes, there may be an exchange of services between two parties. For instance, Company A may be providing landscaping services to Company B that sells office supplies.

At the same time, Company A may also be purchasing their office supplies from Company B. A contra invoice refers to when the payment due from the customer has been offset against the value of the items purchased from them and only the balance amount has been invoiced.

This simply serves to simplify the transactions between the two parties.

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Stage Payment

Sometimes, the buyer does not have the bandwidth to pay for the entire quantity all at once, but the seller cannot wait for an extended time period either.

In this case, stage payment is a good middle ground. The payment is staggered across different stages, with different amounts being set at each stage.

The key here is to find a balance between the needs of both parties. Stage payment can become somewhat complex so it is also critical to make sure the terms are set in stone before any transaction takes place.

This will help avoid misunderstandings and disagreements at a later stage.

Letter of Credit

A letter of credit is issued by a bank guaranteeing that a buyer’s payment to a seller will be received on time and in full. If the buyer is not able to make the payment on time or in full, the letter of credit means that the bank will have to make up the difference.

This is a way for buyers to assure sellers that invoices will be paid on time, allowing them to get better deals or buy larger quantities.

Letters of credit are particularly useful in international transactions. Factors like distance, differing laws, and lack of knowledge of the buyer make letters of credit an important instrument in facilitating international trade.

Conclusion

At the end of the day, invoicing terms are designed for a specific purpose; to keep your transactions as clear and unambiguous as possible. Make sure the terms are short and clear while still keeping the tone polite.

Also, make sure you include everything to protect yourself whether that’s incentives for early payments, interest for late payments, and a number of different payment processing options.

The ultimate goal is to get your invoices paid on time, and the drafting of the invoicing terms should be drafted keeping this in mind.

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