Choosing payment terms

Payment terms set the day money is due. They don't set the day it arrives, and late payment happens in the gap between the two. I recommend choosing a term deliberately, while being realistic about how much of the outcome it controls.

What the common terms mean

Whether those days are calendar days or working days, and what happens when the due date lands on a weekend, is a counting question and not a choosing one. How due dates are counted sets out the rules, and the invoice due date calculator applies them and prints the date to put on the document.

Shorter terms, and when they are ignored

Shorter terms work on payers who pay when they're asked. That means individuals, small businesses, and any client where the person receiving the invoice is also the person with the bank login. For them, Net 14 does get paid sooner than Net 30.

However, shorter terms do very little against a payables department. Larger organisations pay on a cycle (a run every week, or twice a month), and an invoice that arrives after the cut-off waits for the next run whatever it says. With these payers, "due on receipt" gets ignored. It also makes your first chase awkward, because the invoice was technically late on day 1.

Match the term to who is paying. I'd use short terms for small payers. For a large client, find out the payment run and the cut-off, and treat the term as a formality. Getting the invoice in before the cut-off matters more than anything printed on it.

Early payment discounts

Offering 2% for payment within 10 days turns a receivable into cash sooner, but it's expensive. The discount is small in absolute terms, yet it buys you only 20 days, and expressed as an annual rate it frequently costs more than borrowing the same money. Early payment discounts works that annual rate out, and the early payment discount calculator runs it for your figures. Be sure to run it once before you make this a standing offer.

There are two things to watch:

• Who takes it: clients who take the discount are usually the ones who were going to pay on time anyway, so you may be paying for behaviour you already had.
• Late claims: a discount claimed late (paid on day 20, with the 2% deducted) is awkward to refuse. If you offer one, say in the terms that it applies only to payment received within the window.

Late payment charges

Put interest or a fixed fee for overdue invoices in your terms. The main benefit is that it makes the due date look firm before anything is charged. Many jurisdictions also give a statutory right to interest on commercial debts whether or not your terms mention it: the UK under the Late Payment of Commercial Debts (Interest) Act 1998, and the EU under its late payment directive (2011/7/EU). Late payment interest covers where the rate comes from. How it applies where you trade is a question for an accountant.

Whether to charge it is a decision about the client relationship, not about bookkeeping. Late payment fees covers how a flat fee differs from interest. If you do charge, the late payment fee calculator and the late payment interest calculator work out what the invoice is worth now. Whatever you charge has to have been in the terms before the work started, because a fee that first appears on an overdue invoice has no agreement behind it.

The three things that beat the term

Invoicing promptly. Say you finish a job and send the invoice that day on Net 30. It gets paid sooner than the same invoice sent 3 weeks later on Net 14. Of the 3, this has the largest effect, and it's entirely in your control.

Sending it to the right place. An invoice sitting in your contact's inbox is not in the payment system. I recommend getting the accounts payable address before you need it, and copying your contact in, not the other way round.

Getting paid before the end. On a long or large job, billing in stages matters much more than the terms. See deposits and progress billing.