Payment terms represent an arrangement for receiving payment as compensation for the work after the ordered service (goods or services) has been performed.
If you do not clarify the payment terms such as when and how to pay after billing, it will lead to troubles such as the price will not be paid forever even though you worked, or you will be paid by bill instead of cash. It could be. It is important for both parties to present appropriate payment terms in order to complete the transaction comfortably.
In addition, sometimes the payment terms can also be related to compensation if it turns out that the agreed repayment exceeds the specified time limit. The importance of the payment terms applied by a company will have an impact on the smooth running of the company’s financial planning, from budgeting to paying employee salaries.
Due to this very central function, the company must have complete and precise requirements for its customers. Companies are required to make and also implement a clear sales system so that the terms and conditions will be made easier. It is no less important than the company must comply with the payment terms applied by the vendor.
This article covers:
- Importance of Payment Terms
- Most Popular Types of Payment Terms
- What if my customer doesn’t pay within the payment deadline?
- Communicate Payment Terms to Customers Clearly
- In conclusion
Importance of Payment Terms
Sales transactions will have no meaning if your business has not earned money. That’s why setting clear payment terms will help you ensure the company will receive the money it needs to meet your company’s expenses.
Apart from that, it can also provide other benefits like helping you facilitate everything from budgeting to paying salaries and more. Without a schedule and conditions, customers can choose to pay invoices according to their schedule, which can bring problems to your business, one of which is serious cash flow problems and can slow down the business’s operation. Additionally, businesses that don’t have clear payment terms also don’t have the resources to collect late fees.
It is important to remember that selecting and defining payment terms does not mean upset and upset customers. Instead, it offers customers additional options to pay off debts, such as a discount and a line of credit. In some cases, this kind of offer is much better able even to attract business from competitors.
Most Popular Types of Payment Terms
If you have no idea or are still confused about determining the terms of your customer invoice payments, the below Invoice Quickly will provide some of the most popular payment terms and are often shown on business invoices.
Direct payments type of provision means the customer or buyer must immediately make a payment and is due when the product is shipped. In the sense of “Cash Payment” or “Payable on Receipt.” If the buyer fails to make payment at that time, it means that the seller has the right to take the goods back.
This preferred payment method is very beneficial for business owners but will make customers a little uncomfortable. In some cases, the customers may like to use a different supplier to evaluate the products and services they receive before making payment.
This is the most common payment term, which is net 30 days or N/30. This means that the buyer has to complete the payment within 30 days from the invoice’s date. It is important to remember that 30 days does not mean 1 month. For example, when an invoice is written on March 1, the customer is responsible for paying off the payment before March 31.
Apart from net 30, you can also set other conditions, for example, net 60, net 90, and so on. This can all be tailored to your current company’s needs and the agreement between you and the customer.
2/10 Net 30
This provision is almost the same as the provisions above, where the customer must make a payment a maximum of 30 days from the receipt of the invoice. However, this type of provision also offers a 2% discount for customers who pay off within ten days. That way, customers with sufficient cash flow will prefer to pay a maximum of 10 days in order to get a discount and reduce costs incurred. This, of course, is also good for your company or business.
For example, when the purchase was made on March 10, 2021, with a nominal value of $10,000. So the payment due date is March 31, 2021. However, when the payment is made no later than 10 days during the transaction or before March 20, 2020, you can give a 2% discount, which is $200.
EOM Terms (End of Month)
As the name implies, this one payment term states that the company is obliged to pay off the payment before the end of the month. This means that even if the payment is made on any date, the payment is still due at the end of the month. For example, when the payment is made on March 20, 2021, the maximum grace period is March 31, 2021, by making the payment in full without any deductions.
Prepayment is a term of payment in which the supplier receives a credit. This method of payment is prevalent in online trading. The possibility of loss lies with the customer. Formulations for prepayment are, for example
- Cash in advance
- Payment when ordering
- Prepayment when ordering
If your customer pays for the goods or services in cash, a corresponding note will appear on the invoice, such as:
- Paid in cash
- Against cash
- Cash on delivery
Immediate due date
If your customer is to pay your invoice immediately after receiving the goods or services, you can inform them of this with the following formulations on your invoice:
- Payment term: immediately
- Payable upon receipt
- Due immediately after invoicing
An agreement between the supplier and recipient is required for a partial payment. The granting of partial payments extends the supplier’s credit to his customer. You can formulate the partial payment as follows, for example:
- Payable in three installments of $100 each
- Partial payment according to the attached payment plan
What if my customer doesn’t pay within the payment deadline?
The payment deadline has passed and your customer has not yet paid? You should now send him a friendly payment reminder.
The process is usually as follows:
- Payment reminder
- 1st reminder
- 2nd reminder
- 3rd reminder
If you have a small business, you will probably send multiple invoices each month. However, issuing an invoice is only the initial challenge. Next, you must take steps to ensure invoices will be paid on time by customers. To increase the chances of getting paid on time, be sure to discuss payment terms before distributing products or services to customers. For example, providing information to customers, whether cash payments are due at the time of delivery and whether it is permissible to use a credit card to pay off their balance. This is a good idea, given the industry standards when choosing a payment type.
To simplify sending invoices, you can also take advantage of Invoice Quickly accounting software that can help you create and send invoices quickly, anytime, and anywhere, where this invoice will also be automatically recorded in the books of business. Not only that, but Invoice Quickly also allows you to receive payments faster.
Most small business owners will deal with outgoing and incoming invoices regularly. If you receive an invoice from a vendor, it’s important to pay attention to payment options, so you don’t risk losing it. While some supplier invoices set strict payment guidelines, such as asking for cash on delivery, another option is to get a discount by paying early.
While paying early can save you money in the long run, businesses should also take steps to ensure that it won’t leave you strapped for cash. If your customer pays using Net-30 or Net-60 terms, you may find yourself strapped for cash necessary to settle vendor debts. If your vendor offers multiple payment options, you may want to keep cash flow in mind when selecting your preference.
Communicate Payment Terms to Customers Clearly
Generally, small business owners must keep up with busy schedules. While revamping your invoicing system may seem like a burden, the truth is that streamlining your invoicing technique can save you time in the long run.
Set up a clear and specific invoice system and communicate the terms of payment to customers thoroughly. For example, suppose your business only accepts cash. Small businesses should also try to send invoices on the spot when new purchases are made and have just been completed.
Those are some things regarding the terms and conditions of payment that you should know well. Understanding this will help you collect and make provisions in every business transaction.
With Invoice Quickly accounting software, you can set these payment terms directly in the system and help you differentiate payment terms between each customer. In addition, it also enables you to send a reminder invoice when the due date is coming soon, or it’s too late. This will automatically help you receive customer payments and reduce the risk of unpaid invoices. So what are you waiting for? Try it now for free.
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Payment terms must be clearly defined in order to facilitate payment collection. There are some parts that are difficult to claim when it comes to money, but there is nothing that can be neglected. Clarity in business is what leads to credibility. Avoid confusing expressions and make a proper arrangement in advance.