How Do Payment Terms Work?

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Where you aware of the fact that almost half of all invoices end up being paid late?  Late invoices can potentially spell havoc for a company, particularly small businesses, who rely on prompt payments to help maintain cash flow.

But what exactly are invoice payment terms and how can you ensure that you get paid on time? As invoice financing experts, we decided to take a closer look.

How do payment terms work?

Payment terms for invoices clarify exactly how you expect your firm to be paid by another individual or company. You may typically find the following details on a payment invoice, such as:

  • Late-payment penalties (if you charge these for late payment invoices_
  • The currency you work with (if you ship internationally)
  • The accept forms of payments (for example, you may not accept credit cards)

And of course, the most important thing of all on the payment invoice: the due date for the invoice.

Whilst it used to be common for firms to give 30 days in order to pay, this is starting to change. In part, this is due to more and more businesses deciding to electronically send invoices instead, and with most invoice payments these days now taking place online instead of by cheque, the need to provide 30-day terms is becoming increasingly redundant.

Shorter invoice payment terms

These days, most small businesses give shorter payment terms to settle the invoice. In fact, according to data collected by Xero, over 75% of invoices ask clients to pay within a 2-week period.

Nevertheless, it is worth keeping in mind that some clients may expect longer payment terms if it is a bigger bill to pay. Nevertheless, there can still be room for negotiating: if a discount is asked for a larger bill, you could provide it on the basis that they settle the invoice at a quicker pace.

Sending your invoice payment on time

Of course, the key to getting payments on time is also ensuring that you send these to the customer promptly in the first place. Always avoid trying to put invoicing off, as all you are doing is making it difficult for your company first and foremost.

How can you speed up the process of sending invoicing payments? You can do this in a variety of ways, such as:

  • Having invoice templates already set up
  • Sending the invoice electronically
  • Invoicing through your phone (such as on an app)

Don’t fear to chase up invoices

Whilst no one ever particularly enjoys the experience of having to chase up late payments, it is vitally important that you do so. It is also worth making sure you do not leave chasing up payments to late before reminding a customer they owe you money: such as two or three weeks later.

Remember that chasing up the payment doesn’t have to be difficult: simply sending a polite email reminding the client a few days before it is due can be effective, and following up a couple of days after the due date if the payment is late.

In the event that this is ineffective, other things you could try include:

  • Asking your accountant to handle overdue clients on your behalf
  • Using invoicing software that will send reminder emails automatically


Should you put penalties in place?

Yes, there is nothing wrong with putting penalties in place for late repayment, but making these very clear in the terms early on. This will show that you require payment within a certain timeframe and it might give the vendor an incentive to pay on time or earlier than usual. In business, it is not uncommon to put in a 10% penalty for late repayment, for some industries such as mortgages, you might see a 1% charge or things like online payday loans, a £15 default fee for missed payment.

Top tips for getting invoices paid faster

Receiving payments on time is important for a number of reasons, including cash flow. Follow our top tips to ensure you get your payments on time by trying out the following:


  • Discuss payment terms upfront: if possible, you should always discuss invoice payment terms beforehand so that the client has clarity on what it is expected of them, and so you can avoid any potential confusion.
  • Make sure you address the invoice correctly: make sure the invoice is to the person who is responsible for payment. Otherwise, it could end up just getting lost. If you are unsure as to who is supposed to be paying, give the company a call to clarify the matter.
  • Keep the invoice simple: make sure the invoice is easy to understand and is written in a way that will make sense to your customer: one thing that can cause late payments is confusion as to what exactly they need to pay for and why.
  • Keep in contact with debtors: when payments become overdue, always make sure you follow up with reminders, monthly statements or phone calls. Alternatively, you can also use accounting software.
  • Think about adding ‘overdue’ fees: if the payment terms on the invoice have been clearly indicated but they have been ignored by the customer, you are within your right to charge interest.