Invoice payment terms - Meaning, importance, tips
No matter the size and type of your business, you want to get paid on time. This is especially true for small businesses, where you could run into cash flow problems when your customers don’t pay you in a timely manner.
While delays can be inevitable in certain circumstances, you could also encounter late paying customers because of unclear invoice payment terms.
Australia has few legally binding regulations when it comes to chasing down invoice payments, making it more important for you to get your invoice payment terms as clear as possible when invoicing your customers.
What are payment terms on an invoice?
To put it simply, payment terms are the details of when and how your customers are going to pay you. Every invoice that you send your customers should have invoice payment terms so that everyone is aware of when and how to settle the payments.
The payment terms on invoice Australia might vary depending on what your business is and which industry you operate in, but your service agreement will generally have standard invoice payment terms.
Australia, for example, will typically have AUD as the accepted currency, with some invoices accepting NZD and USD as well.
1. Billing cycle
A billing cycle is an interval between invoices when your customers purchase repeat orders from you. One billing cycle is usually around 20-45 days.
When you state your billing cycle, you should also note to your customers when you expect the payment for an invoice to be made. Some common ones are upon receiving the invoice or within 30 days.
2. Payment-related fees
Some invoices might be settled through credit card payments. Your business might want to charge a fee for payments settled with a credit card.
You should state this fee in your service agreement, along with when the fee may increase, such as a quarterly or annual increase.
3. Accepted currencies
It’s important that you state which currencies you’ll accept the payment in as part of your invoice payment terms. Australia will likely see businesses accepting payments in AUD.
Given the proximity to New Zealand, some businesses might also accept NZD. USD is another commonly accepted currency. You need to specify to your customers which of these currencies, or any other currencies, you accept.
4. Credit terms
Some companies might offer credit to their customers. If your company offers credit, you also need to explain your credit terms in the invoice payment terms.
Australia standard credit terms are usually 7 days to pay, 21 days to pay, or 28 days to pay. Any other necessary details should also be included in your credit terms.
5. Late payment policies
To avoid customers making late payments, state clearly in your invoice what is considered a late payment. Include what the fees would be for any late payments and make sure that your customers are aware of them. This encourages your customers to pay on time.
6. Policies debt collection policies
You should define how you intend to collect overdue debts should they happen. When drafting out this section of the invoice payment terms, it is best for you to consult with a lawyer to ensure that your debt collection policy is in compliance with the Australia Competition & Consumer Commission regulations.
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Why are payment terms so crucial for businesses?
If you are a small business owner, you may already be well aware that cash flow can be difficult to manage and stay positive. You aren’t the only one struggling with this issue.
Many small businesses struggle with getting the money that they’re supposed to receive in payments each month. Late payments, unfortunately, are often one of the top causes of cash flow problems.
This could be mitigated by using clear invoice payment terms. Australia is home to many small businesses, a lot of which might have fewer cash flow struggles if there are clear payment expectations for their customers on their invoices.
You and your customers can be on the same page if detailed payment terms on invoice are laid out.
How to put payment terms on an invoice?
Typically, your payment terms will be at the bottom of your invoice. You should ensure that your invoice payment terms are clearly marked as such so that your customers won’t miss them.
There are also plenty of invoice templates that could be found online that already include a section for payment terms that you could draw inspiration from, or use according to your business needs and details.
When can businesses use invoice payment terms?
1. Installment agreements
Your business might offer installment agreements for your customers. These are typically unique to each customer.
As there are often no standardized installment agreements across your business, invoice payment terms can help you define your agreements in detail with each customer.
You’ll have details like monthly installments, down payments, or balloon payments.
2. Subscriptions
It is common for subscriptions to require customers to make their payments upfront. After a customer pays at the start of the month, quarter, or year, they will have access to the subscription for the period of time they have paid for it.
Some subscriptions have introductory discount periods, where after a certain time customers will have to pay an increased price as they are no longer in the introductory period.
In such a case, these terms of the price increase should be outlined on your invoice, along with details of when each payment is expected.
3. Early payments
Your invoice payment terms can also be used to incentivize your customers to make early payments. You’ll have to define what ‘early’ means on your invoice payment terms.
Australia has many customers that will be willing to pay early and help with your cash flow, so long as they get an incentive such as discounts for early payments.
How long should the invoice payment terms be set for?
It’s up to you how long you want to give to your customers before they have to make their payments. Regardless of how long, you should note this down in your invoice payment terms.
Australia has a supplier payment code issued by the Business Council of Australia, which recommends that suppliers are paid within 30 days of the customer receiving the invoice. This is typically what businesses set their payment terms to be.
However, there are options for other payment terms on invoice. Australia sees businesses having 45-day, 60-day, or even 90-day terms. Some other businesses will also do 7-day or 14-day terms.
You also have the option of requesting payment as soon as the customer receives the invoice, but most customers will expect at least 14 days before they have to settle their payments. 14 and 30-day terms are probably optimal for most businesses, as a lot of businesses don’t see a need of extending a term for more than 30 days.This is especially true considering that this is an era where invoice sending and payment settling can be done digitally.
Ultimately, however, it does depend on your business and what it needs.
How much late payment interest should a business add?
One of your worries might be that your customers could be delinquents and not settle their invoices in a timely manner. To avoid this, it’s a good idea to add late payment interest in your payment terms to push customers to pay by the due date.
However, you want to be mindful of what your late payment interest rates are on your invoice payment terms. Australia has no defining law for late payment interest rates, but a good cap for it would be 10% annually.
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What is considered a good payment term?
Good payment terms depend on who you’re asking. The position of the business or the person who receives the funds from an invoice will greatly influence the answer to what is considered a good payment term.
If you are a small business with less cash reserve, you may require payments to be made faster than if you are a multinational enterprise with plenty of cash that you can fall back on.
Regardless of how big the scale of your business is and what industry you operate in, however, the truth is that customers can take for granted invoice payment terms.
Australia, like many other countries, simply considers invoice payment terms as standard business-to-business transaction practices.
To figure out what is a good payment term for your business, you need to tailor the standard payment terms to your business needs.
For example, if you are a small business then 7-day or 14-day payment terms coupled with a certain amount as a deposit might be ideal for your business.
Conversely, if you own a larger business and take larger payments from your customers, 30 days could suit both your business and your customers.
Tips to get paid faster through invoice payment terms
The last thing you want is for your customers to make late payments. Even with payment terms laid out on your invoice, ensuring that all your customers pay on time can still be challenging.
Here are some tips to ensure that your invoices get paid faster.
1. Discuss payment terms in advance
It’s better to communicate your invoice payment terms with your customers even before sending the first invoice.
Any negotiations can also happen in this stage, ensuring that both parties are on the same page and one side is not heavily burdened over the other when it comes to settling the invoices.
When you and your customers both have clear expectations of the whole process, the likelihood of both parties holding up their ends of the deal rises.
2. Ensure timely delivery
You want to make sure that you’re sending your invoices on time. When you send an invoice later than you should, you could end up getting late payments that won’t be the customer’s fault.
The difference between a timely invoice and a late invoice could mean a cash flow issue that could otherwise be avoided.
You should look for digital alternatives that could help you automate invoice generation. Sending your invoices digitally could help speed up the payment process and ensure that there aren’t unnecessary delays.
3. Explore more payment options
Consider having multiple payment options for customers to settle your invoices. While paper cheques have not gone completely obsolete, you should still have other alternatives stated in your invoice payment terms.
Australia has methods like BPAY or even credit cards available to you and your customers. When you have your customers’ preferred methods, they’re more likely to not delay making payments.
4. Enable direct payments
The truth is payments can be a hassle sometimes, especially when the process is complicated. Your customers may not have time for complicated processes to go through with their payments.
Enabling direct payments is a good solution to motivate your customers to pay you. With some invoice management platforms, you can add a button on your digital invoices to redirect your customers to immediately make their payments.
5. Automate past-due notices
An invoice management platform can help you automatically keep track of which invoices have been paid and which haven’t. Allow your platform to send your customers their past-due notices when necessary.
You no longer have to worry about going through each invoice one by one, and you get the added bonus of not having to directly confront your customers about their past-due payments.
6. Charge any “overdue” fees
Overdue fees are good incentives to make sure that your customers adhere to the invoice payment terms. Australia generally sees businesses capping the interest rate of late payments at 10% annually.
But even just the enforcement of overdue fees regardless of how much they are can make your customers respond to their due payments faster.
If the late payment is a first offense, you can even waive the overdue fee when they’ve agreed to pay immediately.
Check what invoice payment terms work for your business
Depending on the scale and position of your business, there may be variations in your invoice payment terms. Australia has certain guidelines, however, that can get you started with the right payment terms for your business.
Keep in mind things like late payment fees, consider how long your payment terms should be and whether or not they should follow the supplier payment code recommendation.
Make sure that your debt collection policies are not only in compliance with the regulations but also outlined in your payment terms. Be clear with your payment terms and enforce them to ensure that your customers take them seriously.
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