Invoice Payment Terms: What They Are and How They Work

Your startup provides a service to the client. The client pays you. You make a profit. That's how it’s supposed to work. 

But anyone in business knows that invoicing and cashing the check can be miles apart.

Mid-size U.S. companies spend about 14 hours per week pursuing late payments. That's why it's essential you have clear invoice payment terms. Presenting terms early in your client agreement can help fend off any disagreement about payment timing, methods, and amounts.

Here's what to consider about invoice payment terms and which would work best for your startup.

What Are Invoice Payment Terms?

The payment terms on an invoice are how and when you choose to get paid by your clients.

It’s important to make sure you put everything you agreed to in writing before providing your services.

Why Invoice Payment Terms Are Important For Startups

Want to get paid on time? Setting upfront expectations about payment amounts, timing, and methods will make sure there’s no argument with clients about timely payment.

For startups, invoice payment terms are crucial since cash reserves may be thinner in the early days of a new business. They might not have made a profit yet. Money in their accounts may be from investors or loans already earmarked for specific growth needs. 

Unlike mid-sized companies that can handle over $300,000 due in late invoices, younger startups would crumble over this scale of late payments.

When payments stall and cash flow trickles, new businesses can hit a brick wall that stops growth. A late payment could more adversely affect a startup needing steady cash flow than a more established company with deep reserves, so strategizing invoice terms is important for growing businesses.

5 Types Of Payment Terms And How They Work

Choosing the right payment term for your business will depend on many factors, such as your cash flow and reserves, revenue targets, and payment obligations for business needs such as rent.

Consider the common payment terms below when evaluating which type would work best for your startup.

1. Net 30, Net 60, And Net 90

This is a fancy way of saying you allow customers to take 30, 60, or 90 days to pay you. These longer-term billing schedules can attract customers.

It may fit well with their own cash flow schedule or be a perk your competitors don’t offer. Just be prepared for this to backfire on you. 

If they don’t have the money to pay you by the agreed 30, 60, or 90 days, you’ll be dealing with late payments. Have the strategies in place to handle these potential delays. 

2. Prepayment

To ensure clients will pay you, you can request payment before delivering a service or product.

The benefits of prepayment include steady cash flow and fewer payment resolution issues. However, some clients may be unable to provide this, limiting your potential customer pool, so weigh this option carefully.

3. Lines Of Credit

You can extend lines of credit to clients. Your client can spend up to the approved limit and get charged interest on the amount they’ve spent.

Not wanting to track interest? You can work with a third-party credit provider who can administer the line of credit, such as a credit card provider or a buy now, pay later provider. 

4. Installments

To help clients pay off large bills, you can offer installment plans. This means they regularly pay a given amount in a given interval until they have paid off the whole bill. Clients may spend more knowing they can break the payments into installments. You may also feel more confident counting on designated, regular payments to help protect your finances.

Estimate installment plans by calculating how much cash from the sale you can go without and for how long. For instance, if a client purchases a $500 service and you can manage to go a month without this cash, you could offer terms of four $125 payments due each week for the next month.

If you could go ten weeks without the cash, you could offer terms of ten $50 payments due each week for those ten weeks.

5. Retainers

In some business forms, adding a retainer fee makes the most sense. This means that clients pay you a fee now with the expectation that you'll be ready to take on their business when needed later.

You must be confident in your availability and work capacity for this to make sense. But the steady pay of regular retainer fees can attract many startups.

This kind of payment system can make sense if one of your primary business products is a service, such as app technical support. This helps your client feel confident that you will be available to support them and more likely to sign a contract with you.

How To Make Sure You Get Paid

As a startup business owner, clear invoice payment terms are necessary to ensure on-time payment. Not only is it risky to go unpaid for longer than the expected term, but tracking down payments can cost you time and resources.

Rely on automated invoicing software to help collect payments on time and consult legal representation so that you know how to enforce payment terms.

Integrating your invoice payments system with a unified financial platform can make the process more efficient and help you see more money coming in on time.

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