Understanding Different Payment Terms and Methods

Are you a small business owner? Getting paid on time is one of the most important parts of running a successful business.

What are payment terms?

Payment terms are agreements between you and your customer, describing when and how your customer will pay for your products or services. The terms can also set out any penalties the customer will incur for late payments. Payment terms are also sometimes called a term of payment.

As a business owner, you should know the ins and outs of payment terms, so that you can choose terms that suit your business.

Why are payment terms important?

With payment terms, you can manage and control when and how your customers pay you. It’s important to specify payment terms before you sell a product or service, in order to avoid confusion later. Clearly outlined terms will also make your business appear more professional.

Additionally, payment terms help you with budgeting and cash flow projection because you’ll know when you’re going to receive money. This will help your business run smoother by making it easier to follow up on invoices and manage financial growth.

Difference types of payment terms when invoicing

Now that you know a bit more about payment terms, let’s take a look at what kind of payment terms you can set.

• Prepayment: Prepayment is when your customers pay you upfront. An example of prepayment can be a painter that wants to receive international payment for a customized painting before making it. You might want to consider offering your customers a discount if they pay before you deliver the goods or services.
  
• Lines of credit: This is a common option for big companies, but can also be used for smaller ones. Lines of credit is similar to a loan, meaning that the customer receives the goods or service upfront, and pays later, according to an agreed-upon schedule. This can be risky for your company.
• Partial payment: Another type of payment term is partial payment. The customer pays part of the agreed-upon sum when receiving the goods or services, and pays the remaining amount later. They can for example pay the remaining amount in small, monthly payments. Remember to specify this in writing, and get confirmation from your customer as well.
• Immediate payment: Immediate payment is when the customer pays as soon as they receive the goods or services. Some contracts allow the seller to take back the goods if the customer doesn’t pay right away. However, this might not be ideal for all businesses.
• Subscription: If you choose this type of payment term, customers pay regularly, for example once a month. Businesses with retainer agreements usually send regular invoices to clients. Automating these invoices can help reduce the amount of manual work you have to do.
• Net payment terms: You can also issue an invoice with a specific due date. Net 7 means that the customer must pay you within 7 days of the invoice date. Net 30 means they must pay you within 30 days. Choosing these payment terms means you have to wait longer for the payment, but a lot of customers prefer net payment terms.

The payment term you choose, will depend on which goods or services your company sells and what terms you are comfortable with offering your customers. Maybe giving your customers a line of credit is the right thing for your business,  or you might go for immediate or net payments instead.

What are payment methods?

Payment methods are the options your customers have for paying when they’ve purchased a service or product from your business. By clearly outlining the acceptable payment methods in your invoices, you’re making sure that your business will actually get paid.

Different types of payment methods

The most common payment methods for invoicing are smart invoices and credit card payment.

Credit card payment

A common method of payment is paying with a credit card. You can request the credit card number of your client.

Keep in mind that credit card payments typically come with higher fees. Some business owners cover these costs, while others pass them on to customers. If you decide to pass the fees to customers, be sure to specify this in your contract. The contract should clearly state that customers who choose to pay by credit card will incur an additional fee.

Smart invoices

Smart invoices allow customers to pay through credit cards, debit cards, and automated clearing house (ACH) bank transfers.

The best way to get paid on time is to issue and send invoices immediately after you’ve sold goods or services. If you wait, it can lead to late payments and disrupt your business’s cash flow. You can easily generate invoices with invoice software, and usually you’ll have the option to set up automatic and recurring invoices to streamline the invoicing process.

How to state payment terms on an invoice

It’s very easy to add payment terms on your invoices. Here are some examples:

• When you require payment in advance: Pay in advance.
• When you offer credit to customers: Terms: Net 10. Payment is due 10 days from invoice date.
• When you extend a line of credit: Line of credit.
• If you want to add late payment fees: For overdue payments, a monthly fee of 2 percent of the total invoice amount will be charged.

Choose a free invoice software

Thinking about starting a business? Or maybe you already have a business and  want to save money on invoicing? You should consider looking into free invoicing software, so that you can spend money on more important things, like supplies, tools or packaging. You’ll also save time by using an online software, because you don’t have to spend time setting up and double-checking your invoices manually. Conta is a free and professional invoice software. It’s quick to set up and you can create up an unlimited amount of invoices. With Conta, you don’t even have to download any software, you can create invoices on your laptop, mobile or tablet. For additional resources, you can also explore Play Free Solitaire Online, a platform offering a variety of tools that can help streamline your payment processing.