Invoice payment terms: What they are, why they’re important and how to choose the best terms to get paid fast. 

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Imagine this: You’ve just wrapped a project and you’re about to send off the invoice. At long last you’re getting paid for the hard work you’ve done. But then you notice a field on the invoice template for payment terms and you think to yourself “sh%# what do I put here?”

Or maybe you’ve been invoicing for a while now and you’ve simply defaulted to plugging something or other in that field. Now, you’re wondering whether you’re using the best terms. Is there a standard? Are you being unreasonable wanting money in your pocket even sooner?

Well, this is the blog post for you.

But What *Are* Invoice Payment Terms?

Before we get into the actual options when it comes to setting your invoice payment terms, let’s get on the same page about what invoice payment terms are. It’s as straightforward as it sounds…

When you send an invoice, you’re basically saying “You owe me $XX” to the recipient. The payment terms let your client know:

  • WHEN that payment is due
  • HOW you want to be paid
  • If there are PENALTIES for late payments
  • Any other TERMS

For such important pieces of information, these payment terms are usually really concise. Some people just use and acronym like EOM, others a single sentence. Let’s look at a breakdown of some of the most common terms and what they mean.

The 17 Most Important Invoicing Payment Terms

Invoice Payment TermMeaning
Net 7Payment is due 7 days after invoice date
Net 10Payment is due 10 days after invoice date
Net 30Payment is due 30 days after invoice date
Net 60 Payment is due 60 days after invoice date
Net 90Payment is due 90 days after invoice date
EOMEnd Of Month: Payment is due at the end of the month of invoice date
PIAPayment In Advance. Used, for example, for deposits or down payments.
CIACash In Advance. Like PIA except payment must be fully cleared before work will proceed.
ImmediatePayment is due upon receipt of invoice
CODCash On Delivery. Another way of saying “Immediate”
Payable on ReceiptAnother way of saying “Immediate”
Contra / Contra PaymentUsed when two companies owe money to each other. Rather than the companies sending full invoice payment to each other, the company owing more simply pays the difference between the two amounts. 
1% 10 Net 30This means there’s a 1% discount if payment received within ten days otherwise payment is due 30 days after the invoice date. Various forms of this term can be used (e.g. 2% 30 Net 90 etc.)
CNDCash Next Delivery. Often used for recurring business. The current delivery must be paid for in full before the next delivery.
CBSCash Before Shipment. This scenario allows the goods producer to take a down payment before creating the product. The down payment helps reduce some risks involved with creation of the product. Commonly used for custom products manufactured to spec (e.g. furniture)
CWOCash With Order. The customer must pay the full amount at the time of the order. Again, often used by businesses manufacturing products to spec.
Cash AccountAccount conducted on a cash basis, no credit

Pro-Tip: Keep it Stupid Simple!

If any of these acronyms are unfamiliar or confusing to you, they could be for your client too. So keep your terms clear and plain. Otherwise, you risk your payment terms being ignored

Why Invoice Payment Terms Are Important

Basically, your goal is to get paid. The invoice payment terms make explicit the terms of payment (and the repercussions for not paying within those terms). Having terms can impact the small business owner in significant ways:

1. Payment Timing

71% of freelancers struggle to get paid

The work is done, so why should you wait and wait to get paid? Depending on the report, sources cite that anywhere between 27% and 50% of invoices are paid late. 

That’s not an insignificant number, especially if those invoices happen to be larger ones that significantly impact your cash flow or ability to invest in your business.

How late payments can hurt you:

  • Cash flow & working capital: Cash flow is a major concern for small business owners. Sometimes, it’s about having the funds to cover expenses, pay contractors and basically stay afloat. Other times, it’s about having working capital at hand to invest in new projects or grow the business. Either way, when you dip into credit because you’re waiting for invoices to be paid you’re playing a risky game. 
  • Inconvenience: I’ll hazard there isn’t a person out there who enjoys sending follow-up emails to tardy clients. Frankly, it’s a big pain in the ass to be in the position of having to ask for money your owed long after the work is done. Unfortunately, even terms won’t stop a bad client from taking their sweet time. But having payment terms on your invoice makes it clear what you expect and gives you a solid reference for those conversations (and worse case scenario for legal proceedings).
  • Client relations: It’s hard to feel warm and fuzzy about the client who constantly takes ages to pay you. I mean, we should all give each other a free pass on the occasional delay… you want to be reasonable after all. But when you know they’re dodging paying you deliberately every time, it can really start to sour things. Clear rules of conduct set everybody up for success in the long run.

2. Payment Method

The standard Net-30 payment made sense back in the days of snail mail and checks and for big businesses that did monthly or bimonthly check runs. But there are many more ways to get paid these days.

A more modern and convenient payment method, like credit card or ACH, makes it easy for your clients to pay you fast (it’s more challenging to ask for payment “Immediate” payment if you say clients must pay with check).

Choosing the right payment method is about finding that sweet spot between:

  • You: What works for you in terms of banking, tracking and speed
  • Your client: What works for your client in terms of accessibility and ease of use

In these days of “tap”, “swipe”or “click” nobody wants to go through a complicated sign-up process (remember your client is getting multiple invoices from different people using different payment methods). Plus extending these payment options can get you paid 2-3 times faster.

It’s worth having an upfront conversation about what works for them and finding that sweet spot!

Bonus Pro-Tip: Always Add a “Thank You!”

Regardless of what terms you plan to state, it’s a good idea to always include a “Thank you for your business” in your terms. Polite gratitude is a human reminder that there’s a person on the other end and sometimes that carries as much weight as the actual terms!

Invoice payment terms

Should You Charge Late Fees?

Many freelancers and small business owners add late fees to their terms as an added incentive to the client to pay on time. It works too. Given a choice between paying bills, people will tend to pay first the one that carries higher fees or interest.

Adding a late fee to your terms helps set and state the repercussions to your client of not paying. But it’s important to be transparent. If you don’t explicitly state the fee in your payment terms, it could be a nasty surprise for your clients. And that could burn bridges. It’s also wise to maintain some flexibility with late payments, especially for clients who are regularly on top of things. 

How Strict Should You Be Regarding Payment Terms?

Clearly, the point of setting invoice terms (with or without late fees) is to get paid reliably fast. The temptation might be there to be a hard ass when clients don’t stick to your terms. 

However, it’s also important to realize there’s a valuable relationship involved (especially for repeat business). So you might want to consider a more delicate touch.

Generally, think about establishing a reminder schedule:

  • Day Before Due: Light reminder that invoice is due to be paid by end of day tomorrow
  • Due Day +5: More direct reminder that payment was due on X date and you would appreciate immediate payment. Ask them to respond if there are questions or concerns. 
  • Due Day +10: Overdue notice
  • Due Day +30: Consider whether to threaten legal action

The right invoicing software can automate these emails for you so you don’t have to think too much about them. But generally we would say err on the side of reasonableness. You don’t want to come across as a person who is inflexible or high maintenance.

Other Factors that Help You Get Paid Faster

In case we haven’t been crystal clear: Invoice payment terms can help get you paid faster. But they’re not the only thing that can help get that money in your pocket sooner. Here are some other tips:

1. Discuss Payment Terms Early 

Don’t wait until you send the invoice to discuss your payment terms. It’s a good thing to cover when you kick off your relationship with a new client. You can reinforce terms when you provide estimates, proposals, project plans or scope of work documents. 

It might feel heavy-handed, but really it’s just being transparent and giving them opportunity to discuss if there’s a problem or conflict. For example, if your client is a bigger company they might still operate with check runs on scheduled dates and you may just have to suck that up.

2. Keep Detailed Records of Time, Expenses etc.

When it comes to getting paid, going back-and-forth over the details of an invoice can really slow things down. If you’re “ball-parking” hours and can’t back them up, or including expenses that you haven’t records of, you’re in trouble if the client pushes back.

So always keep accurate records of how much time you’ve spent on a project (especially when billing by the hour), as well as any expenses incurred (travel, meals, supplies etc.)

3. Get Your Invoice Right the First Time

One sure fire way of delaying the payment process is by making a mistake on your invoice. Not updating the invoice number or date, or making a calculation error can mean back-and-forth with your client that costs time.

These kinds of mistakes are common when using Word or Excel to invoice as you’re often saving over a past invoice. Cloud accounting solutions often automate a lot of these pesky problems, saving you both time and money.

4. Invoice Timing

Deciding when to send an invoice is often as fraught as deciding the right payment terms. 

Some people like to do invoicing as a month-end chore. Again this is a bit of a hangover from the snail mail and checks days. After all, there might be multiple invoices in a given month and who wants to be writing multiple checks. Better to tally all the work into one monthly invoice, no?

But, really, the longer you wait to send, the longer you’ll wait to be paid. More and more people are sending invoices immediately upon completion of each work assignment. 

This approach may mean more invoices and payments to track, but it also keeps cash flowing in your business. Again, a good invoicing system will help here.

5. Invoice Sending Method and Payment Methods

Most invoices are emailed today and we definitely recommend that. But emailing as a PDF attachment is different than emailing with a link that enables online payment.

Generally think about what makes it easiest for your client to pay you right away. You probably know the answer having been through your own fair share of online purchases: Once that checkout process becomes inconvenient, you’re much more likely to abandon your cart. 

Try to offer your clients a similarly easy 1-click experience when you’re sending invoices and setting your payment method. Don’t force them onto a payment gateway that is fussy or unfamiliar.

6. Good Client Relationships

Client relationships are important for so many reasons above and beyond getting paid. But don’t underestimate the impact good relationships have when clients are sorting through and prioritizing multiple invoices.

Everybody knows that those good relationships are a two-way street and that stalling on payment will leave a sour taste. So, make sure you sometimes “put a cherry on top” for your clients so they are motivated to maintain that relationship on their side too!

7. Your Invoicing (and Accounting) System

Your own housekeeping can really be a big factor when it comes to getting paid quickly. Yes, each invoice is its own standalone document. But to keep things running smoothly you want to up-level your thinking to choosing an invoicing (and accounting) “system.”

If you’re haphazard in your approach to managing your finances, it will eventually have an impact on your financial health. This is most likely to manifest in cash flow problems.

So, while you’re thinking about how to send invoices, also think about it as a system to run your business by.

8. Consider Discounts

Discounts should feel special. If they’re used too often they can cheapen or undervalue your goods and services. Plus, if you give them to clients too often they might come to normalize and “expect” them.

But used tactically, discounts can be a great way:

  • Getting more business by offering a discount for volume
  • Strengthening client relationships by making them feel special
  • Building loyalty with that client
  • Nudging somebody to pay you faster 

Of course, you should always make sure offering a discount does not undercut your own profitability. But should you choose to offer one, here are some of the terms that specifically cover discounts:

Discount Payment TermMeaning
1% 10 Net 301% discount if payment received within ten days otherwise payment 30 days after the invoice date. Various forms of this term can be used (e.g. 2% 30 Net 90 etc.)
Accumulation or bulk discountThis is for orders over a certain volume. This can incentivize customers to put in bigger orders than they might otherwise intend
Employee discountYour business might have a policy to give employees as discount as a perk 
Military / Disability / Non-profit / Child discountA discount offered to a certain kind of customer or business
Preferred payment method discount A discount offered for using a specific payment method. This can be effective if you’re trying to move customers from checks to credit card, for example.
Prompt payment discount A discount offered for payment within an immediate time frame. If you’re worried about cash flow this might prompt faster action.
Seasonal discountIf you run a seasonal business, this discount might help drum up additional business during your off-season.

In Conclusion

It’s never a good idea to send an invoice without payment terms. It leaves you open to the recipient’s interpretation of when you want to be paid. Plus, it gives you very little to base a follow-up off.

Whatever terms you choose to use can differ for individual clients and projects, but it’s good to think holistically about what makes sense to keep cash flowing, help your business run smoothly and works for your clients as well.

Always remember that invoicing is still an important way of building client relationships and your invoice and terms should also reflect your business, brand and values. Short, sweet and clear is a good rule of thumb!