You’ve had everything sorted out for your business. You have the right team, and customers love your services. Sales are doing better than ever. Still, you keep wondering why your invoice-to-payment cycle keeps getting longer.
Running a successful business takes more than just boosting revenue and cutting down expenses. You need to make sure that you always maintain a good cash flow. Cash flow remains king, and without it, your business just wouldn’t function.
A 2021 survey by Atradius Singapore reveals that 52% of Singapore B2B credit sales are overdue. Regardless of which part of the world you survey, you’ll always end up with the same numbers.
Here’s the good news; your business doesn’t have to be another statistic. There are actual steps you can take to lessen your average invoice to payment length. And it all starts with improving your customer payment terms. In this article, we’ll discuss the top seven tips for optimizing your payment terms to get paid faster.
What Is An Invoice Payment Term?
An invoice is a document that outlines all essential information regarding a transaction between a seller and a buyer. Among the other pieces of information found in an invoice, the payment term arguably has the most significance.
The payment term lets your customers know exactly when and how they should pay you, along with what happens if they don’t. These terms serve as a clear guide your customers can use when it comes to paying for your products or services.
While you can always choose whatever terms are appropriate for your business or industry, typical payment terms range between Net 30 and Net 60 days.
What Makes Up An Invoice Payment Term?
The components of an invoice payment term are:
- Total amount due
- Payment due date
- How much time customers have to make a repayment
- Payment plans and installment billing details
- Incentives for advance or early payments
- Accepted payment methods
An invoice will display other essential information like an invoice date, invoice number, and list of individual goods, but the ones listed above make up your typical payment term.
Why Are Invoice Payment Terms So Important?
Every vendor and customer negotiation starts by looking at a payment term. A payment term should be a two-way benefit. It should be fair for you and your customer. Choosing the correct payment terms could mean the difference between drawing in more customers and having no customers at all.
Yes, you definitely want to receive payments sooner and lower your invoice to payment window. But, you’ll also want to maintain healthy customer relationships.
The ideal payment term encourages your target buyers to purchase more from you instead of the competition. It also makes them feel valued since you provide terms with their best interest in mind.
Finding the sweet spot between ideal payment periods and customer demands can win you more hearts while providing your business with a good receivables collection period.
Want to stay on top of invoices? Try Peakflo for free.
What Are Some Common Invoice to Payment Terms?
The payment term “sweet spot” varies widely by industry and company. Some companies even go as far as providing terms on a customer-by-customer basis. So, there’s no cut-and-dried procedure for determining a definite ideal payment term. Factors like industry standards, customer base, demands, and even your cash position will likely affect the terms you provide.
Here are some standard payment terms many successful companies use:
- PIA – Payment in advance
- Net 7 – Payment is seven days after the invoice date
- Net 10 – Payment comes ten days after the invoice date
- Net 30 – Payment comes 30 days after the invoice date
- Net 60 – Payment comes 60 days after the invoice date
- Net 90 – Payment comes 90 days after the invoice date
- EOM – End of month
- 21 MFI – Payment comes every 21st of the month following the invoice date
- 1% 10 Net 30 – Customer gets a 1% discount if they pay within ten days; otherwise, a Net 30 applies
- COD – Cash on delivery
Shorter Vs. Longer Invoice to Payment Windows
So, which payment term period would fit well for your business? Before you decide, always consider your business’s outgoing cash flow. Offering broad timeframes for customers won’t make sense if your cash flow takes a hit. Yes, you have happier and more loyal customers, but as a business, being paid sooner rather than later gives you more freedom to put the available cash to work.
Still, there are instances when providing a longer invoice to payment terms can make sense.
Why Some Companies Choose Longer Terms
The more a company can provide delayed payments, the more appealing they become, at least to a considerable portion of their client base, who are also looking out for their cash flow. For some industries, the Net 60 and 90 are the norm.
Providing longer terms lets businesses have a competitive advantage. And if the industry is saturated with extended terms, you might as well offer the same ones to avoid losing market share.
Go For Shorter Invoice to Payment Terms Instead
Here’s the thing, the biggest downside of credit sales is that whether you offer short or extended terms, there’s no way around experiencing late payments. Extending terms won’t help much when mitigating late payments. As you already know, shortening your periods lets cash come into your business faster.
A recent study from Xero revealed that more and more businesses choose terms shorter than Net 30. 80% of businesses would instead collect payments in less than two weeks, and over half of those are willing to shorten their window to just seven days. There’s little reason to feel bad for offering shorter terms, especially if your cash flow is on the line.
Regardless of which standard terms you think are the right one for you, we’ve put together the top seven tips for optimizing your invoice terms so you get paid faster and build a better cash flow.
Top Seven Invoice Payment Term Tips
1. Establish Clear Terms Upfront
The sooner you get things clear with customers, the less likely you’ll experience issues down the road. Not getting terms clear upfront with customers can potentially delay payments. Think about it, how can customers prioritize paying an invoice if they can’t figure out the whens and hows.
Make sure to send out every invoice with terms as clear as day to avoid the risk of confusion. Ensure that you’ve clearly and visibly stated every component, from total costs to due dates to installment options.
Be transparent, answer every customer question, and avoid using vague vocabulary in your invoices. The idea is to make your invoices as plain and clear so that customers know then and there what to expect. Now your customers are better positioned to pay you on time or even in advance.
2. Invoice As Early As You Can
The sooner a client receives an invoice, the sooner they can process and prioritize it. Chances are, like you, your customers may also handle a lot of invoices regularly. So, you’ll want your invoices to remain fresh in your client’s mind.
Issue an invoice as soon as you finish the work or deliver the product. Prompt issues are more likely to get your invoice on a priority list instead of being thrown away into a heap of to-dos. It also reminds your customers that a fee and a due are attached to your goods or services.
If your contract allows it, why not do an on-the-spot invoice? This works especially if your business provides one-off, small-scale services. It’s also not uncommon for small businesses to send out invoices requesting upfront payment deposits. This way, you’ll always ensure cash comes in without start-stops.
3. Make It Easy For Customers To Pay
If you’re not providing customers with convenient payment options, you’re unintentionally prolonging their payments. Luckily, there’s no stopping you from utilizing multiple payment channels to ensure customers pay you conveniently and on time.
By setting up different payment channels, you’re meeting your customer’s needs. You also give the impression that you’re forward-thinking, looking out for each of your customers. Ultimately, this drives loyalty, repeat business, and shorter invoice to payment windows.
If you’re on Peaklfo, offering multiple payment options to customers gets much easier. Apart from intelligent workflows, your customers get an all-in-one portal where they can conveniently pay using their favorite payment channel, whether it’s a local bank, eWallet, credit card, or OTC.
4. Incentivize Early Payments
One of the best ways to optimize payment terms is by rewarding customers for paying early. Early payment discounts encourage your customers to prioritize your invoice and pay you in advance. As you know, cutting down your invoice to payment window can accelerate your cash flow.
Early payment incentives benefit both seller and buyer. You get a nudge on your cash flow while your customer gets a good deal on their cost of goods sold (COGS). Eventually, this strategy lets you build stronger customer relationships, boosting their loyalty to your business.
Make sure the terms of your early payment discount are clear. Write the percentage discount your customer gets and the number of days they have to avail themselves of the deal. For example, your invoice might include a 2/15 – Net 30 indicating a 2% discount upon a 15-day payment (instead of 30).
5. Keep Track of Late Payments
Late payments continue to be a problem for small-medium-sized businesses. Deal with them as soon as they appear. The longer you let them persist, the harder they get to collect. When an invoice becomes overdue, don’t feel bad when giving customers a good reminder.
Still, it pays to be considerate since a late payment might only mean that your client has forgotten your invoice. Don’t start off heavy-handed. A good email reminder or a phone call might be all it takes.
But the longer the payment becomes overdue, the more you’ll have to enforce stronger measures. After your first friendly reminder, your next one shouldn’t be as casual. After all, you need to let the client know that you intend to collect. AR software efficiently tracks overdue payments, even allowing you to implement a more robust credit control.
6. Add Late Fees
If you’re a new SME, you probably need the money – and fast. Adding late payment fees is one way to encourage customers to pay on time. And for those customers who just couldn’t pay at due, adding late fees can at least be enough for them to give you a phone call.
Adding late fees also lets your customers know that you do business seriously. You might only reinforce repeat late payment behaviors if you let a customer off the hook with late fees. Now that’s something you don’t want for your cash flow bottom line.
Late fees can be enough to motivate clients to prioritize you over others, even if they’re just a tiny percentage of the total cost. Just ensure they’re aware of these fees upfront. Dropping surprises down the road is a sure-fire way to hurt relationships.
7. Don’t Hesitate to Automate
You can streamline functions and ease workflows to help get you paid faster using technology. You and your team can resolve many invoicing and collection problems with automation tools. Starting from invoice processing to customer communication and payment collections. By opting for automation, you can:
- Never be late on invoice delivery. You can do invoicing as early as needed.
- Leverage an intuitive record-keeping, where no invoice gets lost, and you check everything you need at a glance.
- Communicate clearly with customers. Provide a payable portal where customers can view their status.
- Trigger automated or ad-hoc multi-channel reminders when an account becomes overdue.
- Offer different payment options. Customers get to choose which one’s convenient.
These benefits are just the tip of the iceberg. With Peakflo’s automation tools, you can slash off resource-intensive tasks, providing you with significant time and money savings. Chasing payments may be inevitable, but putting your process on autopilot gives you the leverage to remain on top of them.
