Invoice Factoring

Small Business

Invoice payment terms: How to get the best deal

Closing deals is often a rush for business owners passionate about their company and the way they help their clients. But when it comes to getting paid once the work is done, the difficulty is in the details. Many business owners – especially if their company is growing fast – struggle with cash flow even if they’re getting business because of long terms of payment (think 30, 60, 90 days or even more!) Having airtight invoice payment terms can help you get a timely payment while maintaining positive client relationships. 

We’ll cover this topic broadly, from best practices for creating effective invoice payment terms to helpful definitions of common terminology. 

 

What are invoice payment terms? 

Invoice payment terms are defined as the timing and manner of payment that a vendor and client agree on as part of a customer contract. In other words, they tell the client when they need to pay for goods or services delivered, their payment options, and what happens if the terms aren’t followed. Your contract and professional invoice should clearly lay out: 

  • Payment due date
  • Payment methods, such as ACH or check (or credit cards, if you accept them)
  • Required currency, if you are doing business internationally
  • Late payment terms, such as when a payment is considered late and any late payment fees

Typical invoice terms by industry

A common payment term is net 30, or 30-day terms. But each industry standard varies widely. Our oil and gas customers, for example, often wait to get paid for 90 days or more. Oftentimes, our clients’ customers have cash flow issues of their own, which is why they ask for an extended payment deadline.

For B2B businesses, check or ACH are still common payment methods. But online payments are becoming more common and a more preferred payment method with the rise of B2B marketplaces that embed invoice financing

Ideas for using invoice payment terms to get paid faster

It’s common sense to invoice quickly and make the due date and payment methods clear and easy to understand. Beyond that, here are a few ideas for getting prompt payment using your invoice.

Bring them to your client’s attention in the contract. When you ask your client to review the contract, ask them to specifically look at the payment terms. If there are any questions or conflicts, you can resolve them before doing the work to ensure payment in a timely fashion.

Be careful with early payment discounts. While this might be worth a try for specific customers who have long payment terms or are late payers, you don’t want to undercut your profits too much. For example, a 5 percent payment discount on your invoice on net 30 terms is basically 60 percent APR!

Keep an eye on costs throughout the project. You likely already do this to maintain your own cash flow and avoid surprising your customer with a bill that’s larger than expected. But it’s also helpful when it comes to the invoicing process. With your costs already in hand, you can send the invoice out as soon as possible.

Ask to submit the invoice before work is done. Long and complicated processes for submitting invoices and getting them paid is fairly common. If you have a good relationship and your customers’ accounts payable department is open to it, you can ask to submit the invoice ahead of time to complete other parts of the payment process sooner (such as receiving a purchase order).

Invoice factoring and accounts receivable financing. No doubt faster customer payments improve your cash flow. If you can’t negotiate for shorter terms (often because your customer is also having cash flow problems), a factoring company, like FundThrough, advances the full total of your invoice, less fees, way ahead of the standard payment terms. Factoring invoices enables you to:

  • Accelerate your cash flow so you have the capital to grow
  • Grow at your own pace with funding you need only when you need it
  • Have the funds to take on large projects and/or more work
  • Make payroll, buy equipment, and hire contractors or employees

When you’re drawing up a contract, if you plan on factoring the invoice, you can build all or part of the cost into the invoice from the beginning. Since FundThrough only charges flat fees, this makes it easy. (It’s also integrated with accounting software platforms like Intuit QuickBooksWorkBench, and OpenInvoice.)

20 Standard payment terms

As you implement these ideas, it’s also important to know the meaning of different acronyms and terminology you can use in your own professional invoice for informational purposes. Find the definition of standard payment terms in the table below.

PIAPayment in Advance. Amount paid before a good or service is received.
CNDCash next delivery. If a product is delivered regularly, this means the current delivery must be paid for before the next one begins.
EOMEnd of Month
Net 7Payment due 7 days after invoice date
Net 10Payment due 10 days after invoice date
Net 30Payment due 30 days after invoice date
Net 60Payment due 60 days after invoice date
Net 90Payment due 90 days after invoice date
Terms of Sale Agreed upon, uniform expectations of the business deal between vendor and client
Recurring InvoiceAn invoice sent out at regular time intervals  (e.g., every month, every quarter)
Line of Credit A specific amount of money that a bank, credit union, or other financial institution lends that you can draw on any time up to the limit
Interest InvoiceAn invoice documenting interest charges for overdue invoice totals, including late payment fees
Invoice FactoringInvoice factoring is a financial tool where a business owner sells invoices to a factoring company. The business owner receives cash for the invoice amount, usually less fees, ahead of the payment terms. The business owner’s customer, who is responsible for paying the invoice, instead pays the invoice amount to the factoring company according to the original payment terms. For more on this topic, see our blog that gives a comprehensive invoice factoring definition.
Invoice financingInvoice financing is a financial tool where a factoring company gives business owners cash for their invoices, and the business owner repays the factoring company themselves. The terms include an agreed-upon repayment schedule, with a fee spread out across the payments. The business owner’s customer pays the business owner according to the established payment terms. Here's a thorough explanation of the difference between invoice financing vs factoring.
Bill of exchange One party promises to pay a fixed sum to another party on demand or on a specific date.
Immediate payment (aka, c.o.d.):Cash on delivery. The customer pays for goods or services as soon as they receive them.
21 MFIPayment due on the 21st of the month following the invoice date
1% 10 Net 30Customer gets a 1% discount if they pay within 10 days. Otherwise the invoice is due in 30 days.
Stage paymentPayment made at an agreed upon milestone
CIACash in advance. The customer pays in full before delivery.

Ready for the next step?

If you’re ready to factor an invoice, or just want to have the option in your back pocket, connect your QuickBooks, WorkBench or OpenInvoice account to FundThrough or sign up for a free FundThrough account today.