6 ways to use invoice payment terms to get paid faster
You can have the best product or service, but if you don’t get paid on time and maintain a healthy cash flow position, it can be hard for any business to survive.
Sometimes, payments are delayed because payment terms are unclear, or invoices didn’t go out on time. In this guide, we’ll look at standard payment terms, best practices for invoicing and what to do when payments are delinquent.
What are payment terms?
Payment terms outline how and when your customers will pay you. These terms will vary depending on the type of business you operate, but generally, payment terms will be outlined in your service agreement or included on your invoices.
Service agreement terms:
Billing cycle — this is the interval between invoices (usually two weeks to 30 days). Your service agreement should specify not only the billing cycle but also when you expect payment (upon receipt of the invoice, within 30 days, etc.)
Payment-related fees — if you charge a fee for credit card payments, explain that in your service agreement, as well as when that fee may increase (quarterly or annually, etc.)
Accepted currencies — specify what currencies you accept (NZD, AUD or USD, for example)
Credit terms (if offered) — if you offer credit, explain the terms (such as 21 days to pay)
Late payment policies — clearly state what your fees are for late payments, and when a payment is considered “late.”
Debt collection policies — define how you attempt to collect overdue debts. You may wish to have a lawyer review your debt collection policy to ensure your business meets its obligations under the Fair Trading Act 1986.
Invoice payment terms:
Terms of sale — this is the language that describes the basics of any sale, such as the product or service, the purchase price, delivery method and fees, the amount paid/payment due, and applicable taxes and fees.
Due date — make sure the payment due date is prominently displayed on your invoices.
Accepted payment methods — include on your invoices all acceptable payment methods (credit or debit card, bank transfer, PayPal NZ or other payment gateways).
Contact information — don’t forget to include a contact phone number and email for whomever manages your accounting or invoicing.
Why are payment terms so important for NZ businesses?
For most New Zealand small business owners, late invoice payments are a major contributing factor to cash flow crunches.
Establishing clear payment terms on invoices can help small businesses project and manage cash flow, as well as manage customer expectations. Detailed invoices reduce the risk of misunderstandings between businesses and customers.
What are the best payment terms?
Most New Zealand businesses used to give 30 days for an invoice to be paid, but that's changing now that invoices can be sent electronically, and payment can be made online.
Shorter payment terms within two weeks are now more common, but have a discussion with your customers first to ensure you’re both on the same page — and you receive timely repayments.
How can businesses use payment terms?
The right payment terms can help reduce customer inquiries as well as administrative tasks. Here are a few ways businesses can use payment terms to improve their processes:
1. Instalment agreements
Some businesses offer instalment agreements, which might be unique to each customer. Payment terms can define these agreements — such as monthly instalments, amount paid upfront or a balloon payment at the end of the agreement.
Subscriptions typically require payments upfront for a certain period, such as a specific dollar amount at the start of each month or quarter. Some subscriptions may have introductory periods, after which subscription costs increase. These details can be explained in payment terms, so customers can anticipate when payments are due, or when rates might increase.
3. Early payments
If you want to encourage early payments, offer an incentive — usually a discount of a certain percentage. Your payment terms can define what “early” means in this instance (a week in advance of the due date, for example).
6 ways to get invoices paid faster
Keep the cash flowing with these best practices for invoicing:
1. Discuss payment terms in advance
Clearly communicate your payment terms before rendering services or sending the first invoice. This will help align both parties and set clear expectations before work begins.
2. Ensure timely delivery
Sometimes, late payments aren’t the fault of the customer. If you don’t have a process in place for generating and sending invoices immediately for a completed order, you may end up waiting longer than necessary for payment. Look for a solution that automatically generates and sends invoices, to remove the opportunity for errors and delays.
3. Expand payment options
Paper cheques are fast becoming obsolete, and while they may be preferred when B2B customers are making a large purchase, many customers prefer other methods. Let customers choose from several convenient payment options, such as direct debit or credit card.
4. Enable direct payments
People get busy. Rather than making customers sign into a different platform to process payment, use an invoicing solution such as MYOB to add a simple “Pay Now” button to all outgoing invoices. Customers can pay for your products or services without ever leaving the invoice.
5. Automate past-due notices
If you’re already using a platform that generates invoices automatically, it should also be able to track the payment of invoices and send past-due notices when necessary.
Removing the human element from chasing down payments is a good way to preserve the business-client relationship.
6. Charge “overdue” fees
If a client chooses to ignore the payment terms stated on an invoice, you're entitled to charge additional fees in the form of interest. Often, a client will respond quickly after enforcement of the overdue payment terms. If it's a first-time offence, you may decide to revert the fees and use it as a warning.
Additional invoice payment terms
1% 10 Net 30: A 1% discount if payment is received within 10 days; otherwise, payment is due within 30 days. (This may also be displayed as “1/10 Net 30”)
1MD: Monthly credit for a full month’s supply
CIA: Cash in advance
COD: Cash on delivery
CND: Cash next delivery
EOM: End of month
GST: Goods and services tax
Net 7: Payment is due seven days after the invoice date. Other common terms using this format include Net 10, Net 30, Net 60, and Net 90
PIA: Payment in advance/cash in advance
How can software simplify invoicing?
The manual creation and processing of invoices presents multiple opportunities for delays and errors. A better approach is an automated invoicing system that calculates taxes, sends invoices and collects and reconciles payments.
With MYOB’s invoicing capabilities, you don’t have to worry about creating and sending invoices. Once you’ve added a customer to our system, we’ll handle the rest — invoicing, reconciliation and reminders for customers whose payments are past due.
Our one-click “Pay Now” option lets customers pay invoices immediately upon receipt, via our secure PCI DSS-compliant payments gateway. We also allow you to customise your invoices with your logo and branding.
We help businesses of all sizes in Australia and New Zealand get timely payments, remain compliant with regulations and uphold the highest standards for customer service. Find out how much easier invoicing can be with MYOB. Start your free trial today!