Invoice payment terms in the UK tell clients when they are expected to pay an invoice and the methods they should use to submit the payments. There are many different terms of payment that businesses use on their invoices.
In this guide, we will help you understand most of these terms.
Having the correct payment terms in place will go a long way towards formalising credit conditions and payments for the customers. They also help improve the company’s payment stats for any aged debt.
Most businesses set their own payment terms, including upfront payments and discounts for early payments.
Now, unless you have agreed on different invoice payment terms, the law in the UK states that customers must pay all invoices within 30 days of receiving the invoice or goods.
There’s plenty at stake when it comes to choosing the right payment terms. This is because they set the tone for your future relationship with the customer, and they also affect your business financially.
You must weigh the standard invoice payment terms in your particular industry and also consider the client’s payment history, plus the potential revenue the job will bring.
The financial impact is way bigger than you think. Imagine if a customer pays an invoice 30 days late, you will end up borrowing money to factor the company to cover your obligations in the 30 days.
The costs involved with doing this are about 4% or even more, and if the customer pays around $10,000 late, you will be losing $400.
Therefore, invoice payment terms wordings are extremely important, and they impact your business significantly. According to QuickBooks, you should be super concerned about payment terms due to the following information:[1]
Therefore, accurate cash flow projections will always help you when planning your taxes, keep your business running well and helps you manage your growth.
A clear and professional invoice ensures that clients pay on time and promptly. When you communicate the payment terms, ensure that your customers are also on the same page, even before the work begins.
Invoice payment terms refer to contractually agreed-upon terms between a business and its customer. They commonly refer to payment terms for when payment is due, relative to the date when the goods or services are delivered or when the Invoice was sent.
NET terms refer to the total amount of money that needs to be paid within a specific period. They can either be NET 30, 60, or 90.
Here’s the formula:
Calculate by finding the difference between the date of payment for the customers taking the early payment discount and the specific date that payment is due; divide this by 360 days.
Example:
When the payment terms are 2/10 net 30, this means that you would have to divide the 20 days with 360 days, which will give you 18 days.
Or another way:
How to calculate 2/10 net 30
— Invoice full amount: $500
— Invoice date: June 1
— Invoice due date: 30 days
— Payment terms: 2/10 net 30
— Discount period: 10 days
Begin counting days from the day after the invoice date.
A quick formula is 100% – discount % x invoice amount.
100% – 2% = 98% x $500 = $490.
Here is a sample invoice payment term template:
As mentioned above, these are the contractually agreed-upon terms for payment between businesses, and they must be included in any contract drawn between you and your customers. They should also be visible on all invoices you send.
The terms you outline should include:
The payment terms usually impact the number of days it will take you to receive payment. Without including them, you will not be able to communicate when you are expecting to be paid.
Here are the most commonly used invoice terms on invoices and what they mean:
Generally, you create estimates and quotes for any new or existing customer so as to get approval for the job before the project starts.
Sometimes you may wish to give your client a discount for early payments, and a common way of expressing this is 2/10 net 30 days, and this means that you will give a 2% discount to the client if they pay the Invoice within the next ten days, even though the Invoice should be paid in 30 days.
Here are some common discount payment terms:
Additionally, the invoice terms and conditions have best practices that must be used and followed in order to make things work fast and simpler.
These include:
There should be a clear distinction of the terms of sales that will wipe out any chances of disagreement or misunderstanding of both parties. Therefore, it is of utmost importance to mention the sale terms, including cost, single unit cost, quantity, date and time of delivery, payment method, etc.
During the cross-border transactions or deals, mention the responsibility of duties, international taxes, and any other regulations that will make the payment process trouble-free.
This is a usual payment term where the service provider asks the client for full or partial payment before delivering the goods or services. It is prevalent in the service industry, plus it is followed to avoid any non-payments.
Mostly, businesses practice this to avoid any out-of-pocket expenses that may be needed to finish the project.
Usually, they are written as PIA and must be incorporated and followed by the business. The client must, however, look out for such things on the contract terms.
As a service provider, you must demand payment immediately after delivering the goods or services if this is your policy. It is often referred to as COD – Cash on Delivery, and this term and condition must be mentioned to the client even before the project begins.
These are explained above, and they refer to advance payments when the client has been offered some credit, and they clearly show when the payment should be expected.
The invoice must have terms of warranty for the service or goods. This specifies the number of days the warranty is applicable and when it’s not. You must clearly state the warranty period and mention what you are willing to do for the client during this period.
For any business, there must be a return policy. This is especially if they deal with retail, and the number of returns they have per product will determine how popular the product or service is.
You will also be able to safeguard yourself from faux orders and claims. The return/replacement terms will reduce any probable losses as a result of the refunds.
You must educate your customer about late invoice payments and the consequences thereof. There is no harm in letting them know your late payment conditions, and these may include:
Most businesses will offer their clients certain credit levels for goods and services before making the payment, but customers are known to delay payment almost always.
This places a considerable strain on businesses as the income needed to run the business is then delayed.
To safeguard this cash flow issue, you should check up on your customers by using the information you receive from credit agencies and analyzing company accounts.
You should always explain the conditions and terms of payment to the customers at the beginning of every relationship. You could send them a written confirmation always.
Another condition you need to consider is electronic payments, as this makes it easy to keep track of all payments instead of cash.
Here’s how you can best choose the payment terms for your clients:
The client’s history will tell you about their payment habits, and you can easily find this out through previous relationships the customer has had and their credit information.
You are allowed to pull the business credit report as well, and this will show you whether they pay on time or they are delinquent with their suppliers.
In the beginning, you may also want to require them to pay upfront or at least 50% of the cost to show their commitment.
Even when a client has good credit, working with someone new will always have a level of uncertainty to it and testing the waters is advisable. First, you could do the project in phases and ensure that you get paid in each phase before proceeding to the next.
For the smaller invoices, you may not wish to spend too much time chasing the payment, e.g. when it’s just a few hundred dollars. In this case, you should require the payment to be upfront or immediately after the delivery is made.
A longer deadline is necessary for the larger invoices so the client can come up with the funds. In case you have a new client, asking for upfront payment or deposit is advisable, so you can reduce any risk of non-payment.
Most business people swear by Net 30, and they say that this always works for them.
You should consider adding late interest charges to the invoice terms and conditions in order to enforce the payment expectations. It is usually customary for businesses to charge between 1.5 and 2% of the invoice amount.
This is the fee charged for any late or overdue invoices.
Payment terms are normally consistent across the board depending on the industry you are in. It also depends on the size and length of the job you are doing.
If your business falls into an industry where the terms are Net 30, you do not have any flexibility on that.
The main categories that businesses fall into when it comes to setting the payment terms include the following:
Now, to make sure that your invoice is paid on time, you will need to do enough research to determine the best terms and conditions for your customers.
Setting the right terms early in the contract will ensure that you are paid much faster, and this helps you have a positive cash flow at all times.
This refers to the most common terms that are used by freelancers when they are dealing with their clients:
This is how you would handle any payments not made on time or in full by the invoice date. One of the most common ways of handling this type of predicament is by adding penalties for non-payment and unpaid invoices after the due date has passed. This includes interest charges.
Once clients know that they are likely to pay a higher bill simply because they did not stick to the rules, they are more likely to pay on time. It makes billing easier, predictable, and reliable, enabling you to achieve higher financial freedom for your business.
Every invoice you send must have a due date, so your client knows when they are supposed to make payment. Some of the most common due dates have been explained above, and they include such terms as; Net 7, Net 15, Net 30, Due on receipt, Or advance payment.
Different businesses will choose to use different payment modes.
Of course, they choose the most convenient way of receiving payment that is also hassle-free for both them and their clients. Ensure to outline this in the invoice and let your client know which method you accept.
Making this clarification will prevent you from winding up with a check when you would have rather received cash or credit card payment.
It is quite common for companies to offer discounts to their customers and sometimes discounts help you get paid earlier and it also encourages a full payment. Certain discounts encourage networking among your clients and could land you a bigger contract.
For example, you could offer a certain percentage for either early payments, payments within 10 or 20 days, for large purchases, for a second or third order, etc.
As a business, you probably have clients who are in other countries, and as such, their currencies are, of course, different. In this case, you must ensure to give them the right currency, which you expect to be paid.
This is an important payment term that must be outlined when setting up the contract. For example, if you wish your client to pay the invoice amount upfront, you will need to tell them way in advance, even before signing the contract.
Payment terms on invoice can be included in the following places:
Quotes are a fantastic place to introduce your guidelines and payment terms. The quotes will tell your client what they should expect even before you start working together, and they help set a clear vision of the working relationship you will have together.
In the quotes, you do not have to spell out all the details of payment, such as the exact amounts or due dates, and they can cover some basics such as;
The contract should be where you specify all of the payment terms in great detail. If you have used an online template, you can create a contract and then look at which payment terms to include and then adjust them as needed.
It is extremely important for the terms in your contract to be reviewed and signed by the client. If there are any serious payment issues or disputes, these terms will help you if anything winds up in court.
So, similar to quotes, the invoice does not have to include the nitty-gritty details of the payment terms, but it should have the following information:
It is, however, simple enough to just add these lines to the invoices to detail this information without necessarily making it too complicated.
VERY. There is no point in coming up with payment terms if you will not stick by them. As a business owner, you rely on prompt payments to keep your business running, and as such, payment terms are paramount to this.
Whenever a client goes against these terms, such as paying for goods and services late or even using a different method that is not your preferred method, you do not have to get accusatory or aggressive.
Instead, you should let your payment terms become your point of reference to gently remind them of what you both agreed on for the project. These payment terms are supposed to protect you and help you in running a good business.
So, the answer is “Very Strict.” You have to be very strict regarding payment terms.
Here are a few ways of ensuring that you come up with better payment terms with your clients:
Of course, not all of your clients will agree to new payment terms. You must be extra careful when dealing with the existing clients, although new clients are easy as you do not have a pre-existing contract.
Go through your current client list to identify those that are willing to take on new payment terms. You should look for the kind of clients who have been with your company for a long time and those who believe that you are the best at what you do, which means you are not likely to lose them.
Another way you can go about this is by offering them incentives such as discounts for early payments and free delivery, among others.
You are free to set your payment agreements, and you do not have to stick to the agreed 30, 60, and 90 days. You could come up with payment terms every two weeks, where you allow the client to pay a little at a time.
For large corporations, the likelihood is that they will want to get longer payment terms such as 90 and 120 days.
If that is unacceptable to you, you will have to decide whether you will continue with the client or not, although the large companies tend to have the biggest orders that will change the status of your business.
It is wise to always be honest with your clients, especially the new ones. Let them know that you are not willing to wait for more than 30 days for an invoice to be paid, but you must never threaten them in any way.
Negotiate with them until they understand the need for early or on-time payments.
Remember that you are still a business person, and you need your clients at the end of the day to buy your products and give you money.
As such, do not be too rigid and strict when it comes to such negotiations.
Be open to talks and listen to your clients to have an agreement to proceed with the business.
For example, if you are dealing with a start-up, be willing to compromise as they are just getting their foot off the ground, and this means that they do not have as much cash flow as you would expect or that they depend on sales to make money.
Before going into business with a new client, properly research them, and especially their business. Find out how they currently pay their suppliers and their credit scores.
Be sure to understand what kind of business they are in and how such businesses perform. This helps when you need to know whether they will sell the goods on time and pay you back.
You must ask yourself how many credit facilities they have already taken, so you can understand their credit position.
Related article: How to negotiate fair payment terms during COVID-19Most clients will do all sorts of things to make sure that their clients pay on time. Yet, despite all of this, they still have lots of unpaid invoices waiting for them to follow up.
This is quite irritating, and it is good to know what you can do.
Here are a few ways you can use to encourage your clients to abide to the payment terms:
You could allow the clients to pay in installments of milestones. In this case, you receive payment after each stage of the project, at which point you move on to the next stage. Without paying for the first stage, then the project does not proceed.
Customers are therefore more likely to pay and be on time throughout the lifespan of the project.
In the invoicing world, NET is another word for full payment, and most customers will insist on either net 30 or Net 60; this is way too long for any business to accept, and condensing the timeframe and requiring them to pay after a project is completed, or goods are delivered will help you get paid faster.
You may consider asking for a deposit before the project kicks off. This will cause the client to complete the payment early, in order to have their projects done on time.
Some customers are simply geared towards paying late, and regardless of how attractive your on-time incentives are, they will never send the money when it’s supposed to.
In this case, you have to be strict, and the best way to go about this is through threatening them with charges and late payment fees for late payments.
This practice is allowed by the law, and you can charge them additional costs of about 1.5-2% of the total invoice amount that remains unpaid. You should, however, not just say it; you must implement it whenever they are late with payments.
This means that you should monitor and track all invoices to identify the customers who haven’t paid. This can either be done manually, or you could automate the process and put up alarms when due dates come around.
There are plenty of web-based systems such as accounting software that can be used for this purpose. Regularly reminding clients of payments, they should make could be the push they need to make the payment.
For the business relationship to work, talking with your customers constantly is necessary. This helps build respect and trust, plus you can know where they are when it comes to paying the Invoice.
When you have this strong connection, you are likely to have clients who will pay promptly and without any arguments to retain the relationship.
Offer your clients incentives for early and prompt payments, such as offering them discounts. This is great for them as it will save them some money.
Additionally, it helps you because you will have cash at hand and keep your books accurate.
This gives your clients options and ensures that you accommodate everyone and their needs. This is a great way of encouraging them to pay on time and quicker as they do not have to start adopting new ways of payments, which may discourage them.
Adopt a system of ordering and paying for goods and services that is easy on your customers. There are many dedicated ordering platforms that you can use from a single dashboard, and these will keep track of all the clients and their orders plus payments.
People love easy things, and this is a fantastic way of making life easy for the customers.
Here are a few tips you can use to improve the invoice payment terms and to aid your business cash flow:
As we have already explained, Net days refer to the total amount of money that should be paid within a specified number of days after the invoice has been sent. The standard days are either 30, 60, or 90.
Shortening these days to let’s say, two weeks or 14 days, means that you will receive your money much faster. The faster the payments, the better your cash flow.
However, be careful because not all customers will be open to this, and you may end up losing some of them due to the shortened time frame. Communicate in advance and discuss with the client beforehand.
When setting the deadline, use the number of days you want to be paid and not the distinct due date.
Okay, let me explain this; for example, if you wish to be paid on a date like 4 th of April, that is approx., 15 days away, simply tell the customer that you wish the payment to be made within 15 business days. This is clearer.
When this is done, the customer is likely to mark this on their calendar to forget. Customers do not like to pay early but rather on the due date.
Communicate clearly when it comes to payment terms and ensure that your customers understand these terms well. Let them know when the payment is expected, the late payment fees, and the consequences of non-payment.
All of this should be done before the contract is signed. But, ensure to be polite at the same time as you talk to your customers.
It is extremely important to write down the payment terms as this shows the proof of the agreement with the customer.
Let all the payment details be written out and discussed with the customer. Also include all the information needed, such as the customer’s address, their scope of work, and the invoice number. This information will come in handy in case there are disputes.
There are numerous incentives you can offer your clients, but one that is sure to work anytime is giving them discounts for early payments, which motivates them to play faster and early.
When you give them a discount on the total bill, you can receive money early, which is great for your cash flow.
Data based on millions of UK invoices sent over Xero.
FreshBooks data analytics of 1,393,062 invoices sent.
When you decide the payment terms for your business, there is something you must know; when you extend your payment terms for too long, you will end up jeopardising the future of your business.
Why?
Because the business normally decides the invoice terms. E.g., restaurant owners are usually paid within one or two days, while companies that deal with constructions can wait for up to 90 days to receive the funds.
Here are some of the typical invoice payment terms by industry:
Typically, this is usually up to 90 days, and can even be more.
The payment to subcontractors who are working in construction often get delayed, and a recent study published by Rabbet showed that only 88% of contractors received payments in 30 days, and 46% of them received between 60 and 90 days.
This causes considerable costs to the business and the research further showed that construction companies incur almost $40 billion per year on expenses trying to cover up the cash flow problems.
The average payment terms for the construction industry is 37 days.
Now, although this is the allocated time, the period varies from client to client. For example, Proctor & Gamble in 2017 decided to revise their days so they could pay their shippers between 75 and 120 days.
Another company, the Kellogg company, a very large manufacturing corporation, implemented its 120-day policy.
Delays in receiving money can put a huge strain on shippers as they will be required to make payments to the drivers, pay for fuel, among other expenses.
Average number of days – 68 days.
According to the study we mentioned above, it was found that contractors who provided building exteriors, structure, and foundation had to wait at least 68 days to receive payments due to them.
Average number of days – between 30 and 90 days.
If you currently run a repair shop, you expect your clients to pay you as soon as the work on their cars is completed. However, the bills run into thousands of dollars in most instances, and the clients may not afford everything at once.
In this case, if you know your customer well, it is always a good idea to offer them a payment plan, which would provide them with credit for several days.
You could also choose to link up with a bank or creditor who would be willing to offer loans or credit to pay for the repair work. This means that you will get your money immediately and not have to wait for three months or so to get paid.
Average number of days – 14 days.
This is an industry with ongoing services, and for the one-off services, you may want to ask for a deposit before the work starts. Still, for the ongoing services, whenever a job is complete, especially if it is a big one, you will have to wait for payment.
Average number of days – instant or a week later
This is an industry that doesn’t have any problems with instant payments. When it comes to large jobs, most landscaping businesses ask their customers to give them part payment or a deposit before work starts.
This could be a percentage of the total amount paid as a whole or on a milestone basis.
Average number of days – 3 days.
If you have a restaurant, then a significant portion of your sales will have to be cash. This helps you improve your cash flow and liquidity and gives you the money needed to pay your suppliers and meet other expenses.
Any sales made on credit or debit cards usually have delays in payments, although, in most cases, you are likely to receive the money in a few days.
Average number of days – 3 days or immediately, and you can get even more if you are offering store credit.
A huge portion of the retailer’s sales is either card or cash, and therefore more payments will be received within three days.
Average number of days – 3 days.
For small farmers that sell their products to consumers directly, getting payments quickly is never a problem, and they can receive the sales proceeds either in cash or by card. However, they can get paid within three days or immediately.
Average number of days – 3 days.
In the hospitality and leisure industry, most payments are made by cash or through credit cards. The total amount due is received in a matter of days, but credit card fraud is a common worry.
For example, if a hotel guest pays using a stolen card, the issuer will be unwilling to bear the loss, and hotels will reduce the risk by asking their guests to provide a photo identity when they make payments.
Average number of days – 74 days.
When you provide professional services to clients, it is best to negotiate the payment terms when you are negotiating the contract. Having a credit period between 30 and 60 days is sufficient, but you may want to wait a little longer than that to get your money.
According to a survey by Sageworks, (now abrigo.com) found that firms that offer engineering, architectural and other related services received their payments after 74 days.
Payment terms: Immediate
Real estate brokers usually receive an amount due to them upon completing all transactions. Still, the sale or purchase deals for different houses and rental properties differ and could take weeks.
Here’s what you should expect in terms of invoice payment terms for different countries:
The payment limit terms are usually 42 days, but with no contract between the parties, payment must be made within 28 days of the request.
According to the Australian Payment Times Reporting Bill of 2020, all companies must have a turnover of more than 100 million dollars for them to report on the payment practices and terms for small businesses after every six months.
The Business Council of Australia also promotes the Supplier Payment Code, where the members must commit to paying their suppliers within 30 days. [8]
The Australian government has also committed itself to pay all e-invoices within the first five days and all other smaller suppliers within 20 days.
However, the Australian Small Businesses and Family Enterprise Ombudsman has been investigating commercial payment terms for most businesses and especially SMEs, and they have been debating how they can introduce additional laws.
In Canada, the Federal Prompt Payment for Construction Work changed the payment terms for federal projects to 42 days – this represented; 28 days for the prime contractor, seven days for following all subcontractor payments, and another seven days for all sub-contractors to pay the suppliers. [9]
Each of the Canadian provinces has a process of setting up its additional laws for late payments.
However, the general conditions with the service contract and the public services commission of Canada state that the standard terms are 30 days for all public service contracts.
The grain financial protection program in Canada states that all owners and producers must make payments for sales delivery within ten days.
The EU Late Payment Directive was enacted by The European Communities. In practice, all government entities target payment to be within 15 days and not 30 days. [10]
All construction contracts that were awarded after the 25 th of July 2016 are bound by these laws, and the main contracts are able to negotiate new terms with their clients but they are limited to 15 days, or 30 days, for all work that lasts less than 45 days.
In New Zealand, the government is currently considering the discussion paper about improving business to business transactions and payment practices and they are proposing a maximum payment term of 20 days. Although there is no law existing in New Zealand targeting the payment of suppliers.
In Singapore, the Building and Construction Industry for Payment Act talks about “Pay when Paid,” clauses. These set the maximum terms and unenforceable terms for progressive payments for contracts of 35 days from the date of the invoice with a default of at least 14 days. [11]
For all supply contracts, the maximum terms is 60 days and a default allowed for 30 days, in cases where the terms are not specified in the contract.
The Treasury Regulation in South Africa makes a requirement on the government to pay their suppliers in 30 days. [6]
This is run by the National Small Business Chamber who stress on the importance of big business paying all the small suppliers in under 30 days.
The construction industry however gives a limit of “Pay when paid,” which means that you should pay your suppliers only when you receive payment yourself and this adjudication and resolution actually does not specify the exact term.
In the US, The Prompt Payment Act is under Federal Law that governs the payment terms for government agencies. Generally, the terms from the government are usually limited to 30 days. [7]
10 days are for perishables and dairy, 7 days for poultry and meat, and then there is 15 days for all SMEs.
This act actually covers for government construction projects that require payment to the contractor within 14 days and also a further 7 days for payments to sub-contractors.
All US States, except around 15 of them have enacted laws that cover Prompt Payment when doing private construction projects.
The United States Department of Agriculture requires that all the livestock sold should be paid by the end of business the next day once the final prices of purchase has been determined.
But, for any live poultry that is obtained under the growing arrangement for poultry should be paid by the 15 day of the following week.
California – the food and Agriculture code states that no payment period that is agreed on the contract for the producer and dealer on farm products should exceed 30 days from the date of delivery.
Florida – the General Law states that the non-stored grain should be paid in six months after the date on the contract or the delivery date.
Idaho – the law in this case requires that the commodity dealer pays for the commodities when the goods are delivered and should not be more than 30 days after delivery, unless there is another agreement between the parties.
Iowa State – the code requires for grain dealers to pay their invoices within 30 days after delivery is made unless they are using a credit-card for the sale.
Louisiana State – the law in this state requires that grain dealers spot price contracts and purchases of the cotton and rice to be made in 10 days after delivery.
Minnesota – The law in this case states that all of the gain purchases should be paid by the end of day the following day after delivery. This is roughly 48 hours.
Missouri State – the law states that grain dealers should make payment on delivery, unless both parties have got a written contract that defers payment.
Montana State – In this state, the law requires that all grain dealers should make a payment of 90% on the delivery of the goods and then pay the remaining 10% within the next 30 days after the delivery has been made.
Oregon State – the law requires for agricultural commodities such as sugar beets, animals, fish and seeds to be paid within 30 days of delivery.
Washington State – the law requires that all agricultural commodities be paid within 30 days after delivery, unless there is a different condition in the contract.
Nebraska State – the law states that grain purchases to be paid within 30 days after delivery. Additionally, the Federal Milk Marketing Order has set out the payment procedures for timeliness when it comes to milk associations across all of US.
Generally, the payments to the producers should be made either on the 26 th or 27 th of the month, and the final payment made by the 15 th of the following month.
California – this state is not covered by the federal milk law and there is a schedule of payment that is done through cooperatives to make partial payment of the purchases by the last day of the month, with a final payment being made on the 16 th day of the month after delivery.
The US Government launched a SupplierPay initiative that consists of 26 companies who pledged to pay the small suppliers early and also provide them with affordable working capital financing for their businesses.