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Latest News The importance of getting the right invoice payment terms

The importance of getting the right invoice payment terms

The importance of getting the right invoice payment terms

Getting paid is vital to any business, but conversations about payment terms can be uncomfortable. We explore why setting terms upfront is so important and offer tips on how to get your invoices paid faster.

What are invoice terms?

Invoice payment terms tell clients when and how you expect to be paid. The timescale for payments varies due to several factors, including the industry you work in, the type or scale of the work being carried out, and your own business terms and conditions.

How long should your payment terms be?

The most common payment term in the UK is 30 days end of month or from date of invoice, and this means the invoice must be paid within these terms from the client accepting the invoice. Some large businesses operate on longer terms – such as 60 or 90 day payments – but these are becoming rarer. In fact, the trend is moving towards shorter invoices, with up to 75% of businesses asking for payment within two weeks.

How do you calculate late fees with invoice terms?

Under the terms of the Late Payment of Commercial Debts (Interest) Act 1998, you can charge ‘statutory interest’ on an overdue invoice, which is 8% plus the Bank of England’s base rate. Remember that you can’t apply statutory interest if your contract sets out a different late fee.

Here’s an example of how to calculate statutory interest using a Bank of England base rate of 4%:

  • Your business is owed £1,000.
  • Annual statutory interest is £120 (12% of £1,000 or 1000 x 0.12)
  • To work out the daily interest, divide £120 by 365 (33p per day)
  • If the payment was 60 days late, the total interest owed would be £19.80 (0.33 x 60)

Here’s an example of how to calculate statutory interest if the Bank of England base rate was 0.5%:

  • Your business is owed £1,000.
  • Annual statutory interest is £85 (8.5% of £1,000 or 1000 x 0.085)
  • To work out the daily interest, divide £85 by 365 (23p per day)
  • If the payment was 50 days late, the total interest owed would be £11.50 (0.23 x 50)

What do you say when an invoice is late?

If you’re running or managing a business, you’ll likely come across late payers at some point. Having the conversation (or the anticipation of it) can feel uncomfortable and awkward, but it really shouldn’t be.

The first thing to do is resend the invoice (check it’s correct) with a covering email or letter that’s friendly but firm. For example, you could say:

“Dear [client name], this is a quick note to say that we haven’t received payment for [invoice reference], which was sent on [date] and reattached here. Our invoice also includes details on late payment fees.

Please arrange for payment to be made as soon as possible. The easiest way is by [add your preferred method here]. If you spot any issues, do let us know.

Kind regards, [your name and details].”

It could also be worth following the email or letter up with a phone call. But either way, keep a note of when you chased your client and be ready to follow up if they don’t respond within a reasonable amount of time.

How do you motivate customers to pay on time?

It goes without saying, but good client relationships go a long way in helping admin run smoothly – including to get invoices paid. That said, it’s also good practice to maintain professional boundaries, which include setting out clear payment terms within your invoice.

To encourage clients to pay on time, you could offer preferential early payment discounts. One common example of this is the ‘2/10 net 30’ method. This formula means that the client will get a 2% discount if they pay the invoice in the first ten days of receiving it. The ‘net 30’ simply refers to the standard 30-day payment term.

You don’t have to use the 2/10 net 30 method, and you may prefer to specify different terms for different clients. You may also want to increase the discount or the early payment window. Fundamentally, it comes down to what works for your business and cash flow.

Top tips to help your invoices get paid faster

  • Discuss payment terms before the work begins

Making sure your client knows what you expect from them from the start will prevent confusion further down the line. It also details your payment expectations from the outset.

  • Keep thorough records – and don’t scrimp on the details

Keep your records up to date so that you can you let your client know what’s happening with plenty of time, rather than sending them a costly surprise at the end of the month.

  • Ensure your invoice is simple and straightforward

The last thing you want is for a payment to be delayed because of a confusing invoice. Be specific about the time frame, and make sure you add a clear description of the work you’re charging for. You should also include full details of how to make the payment – find out more about what needs to be included here.

  • Address your invoice to the person who will be paying it

This sounds simple enough, but in larger companies, accounts departments are often disconnected from client facing teams. To help your invoice get paid quicker, find out who to send your invoice to because it might not be the person you deal with on a day-to-day basis. Make sure to keep the invoice contact up to date – if you send your invoice to someone who has left the company, there will inevitably be a delay in getting it paid.

  • Send your invoice as soon as possible

The sooner a client gets an invoice, the sooner they can pay it. Sending invoices promptly also means the work is still in the client’s mind, reducing the chances of a forgotten payment.

  • Keep talking to clients

If the payment becomes overdue, send a reminder, a monthly statement or pick up the phone and talk to your client. There are many reasons why an invoice might be left unpaid, and keeping in touch can help minimise issues and serve as a reminder that you’re still waiting to be paid.

Can I reduce the risk of non-payment?

Non-payment is always a risk for any business, but setting out clear terms and maintaining good relationships can help keep things running smoothly. That said, you can protect your business with safety nets such as credit insurance which can minimise income loss if a client can’t pay. You can find out more by contacting a member of the team on 01223 324233.

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