Establishing clear payment terms is one of the easiest steps on the road to getting paid on time and getting paid promptly might be harder than you think.
Across the UK, nearly 40 per cent of all invoices sent out by companies were paid late, leaving businesses with an average of £34,286 missing from their accounts.
It’s not just your account balance that suffers from late payment of invoices. Recent survey data has indicated that:
Late payments caused 25 percent of businesses to be unable to hire vital new talent.
Around 23 percent of business owners were unable to buy new equipment due to cash flow issues caused by unpaid invoices.
Unpaid invoices caused 20% of small business owners to cut back on their marketing efforts due to a lack of capital, slowing the growth of their business.
A huge 79 percent of small business owners cut their pay in response to unpaid invoices, rather than incur late fees by not paying their suppliers, rent, or utilities.
While clear and well thought out payment terms aren’t magically going to solve the issue of the £50 billion in unpaid invoices that UK businesses have to chase every day, it is one factor in implementing effective credit control.
If you don’t currently have a clear set of invoice payment terms in place, we’ll be showing you what they are, why they can help you get paid on time, and how to improve your payment terms.
What exactly are invoice payment terms?
Invoice payment terms, often shortened to payment terms, are instructions on how and when you want to get paid for your goods or services.
They form part of the contract you sign with your customer and set out, in detail, your payment details, your preferred payment method and how long the customer has to pay your invoice.
That last part is vital as it can have a huge impact on your business’s cash flow.
Are there standard payment terms?
There are no mandated or specific payment terms you have to abide by.
In the UK, the usual payment window is 30-days and GBP is the primary currency.
In the EU, especially in Scandinavia, there is a trend for shorter, 14-day payment terms, while in the U.S 60 or even 80-day payment windows are not unheard of.
Outside of the UK, most international businesses are happiest to trade in USD.
What do Net, PIA, POD, EOM and MFI mean?
The payment window included in some invoice payment terms is often shortened to an acronym. Some of the most common are:
Net - Often followed by a number, such as Net 30, this indicates the number of days, after the delivery of goods or services, that the customer has to make payment.
PIA - This means payment in advance and indicates that payment will be provided before the goods or services are delivered.
POD -Payment on delivery indicates that the invoiced amount should be paid as soon as the goods or services are delivered.
EOM - This means end of month and indicates that payment should be made on or before the end of the month.
MFI - This is normally preceded by a date, such as 15 MFI, and indicates that the payment should be made not later than the 15th of the month following the invoice.
What should my payment terms include?
Your unique payment terms will likely reflect the specifics of your business, but there are a few things that every set of payment term should outline:
Your payment date - While the standard payment window is 30-days after the receipt of the invoice, you can choose to alter that window. Since most invoices are paid late, you might choose to shorten that window to 14-days. Shortening your payment window will likely mean more invoices are paid late, but you might actually still get paid faster than putting in a 30-day window.
Your payment details - This includes your account details and your preferred payment method. Having the widest possible range of payment options makes it more likely that you are going to get paid on time. That is why our Payment Portal supports transactions as well as credit and debit cards.
Your preferred currency - This one is rather situational, but if you do a lot of overseas trading, it can be useful for you to stipulate that you want to be paid in a certain major currency, like GBP or USD.
If you’re a small business owner, the sad reality is that a lot of your invoices are going to be paid late. Thankfully, there are steps you can take to mitigate the impact of late payments.
Having clear and highly visible payment terms in your contract gives your customers no wiggle room when it comes to paying you. Making it part of your contract means the customer has read, understood and has agreed to those terms in advance.
We always recommend that you include late payment fees as part of your payment terms to further incentivize your customers to pay on time.
How can I improve my payment terms?
Having clear payment terms is just one factor in implementing effective credit control. There are other steps you can take, including:
1. Automating your accounts receivables
Chaser’s innovative take on automation allows you to keep all the time and effort saving benefits of an automated system, without any of the blandness.
Our editable templates make sure all emails sound like it comes directly from you and is sent from your email address.
You can schedule multiple email reminders to send to different customers at different times and even have our platform send out automated ‘thank you’ emails when payment is received.
Chaser has helped our customers recoup 80 per cent of their outstanding invoices and get paid an average of 16-days faster.
2. Outsourcing your credit control
Effective credit control is effort-intensive and might take you away from focusing on growing your business. You might also not be in the position to hire a dedicated staff member to manage your accounts receivables.