One of the critical cashflow challenges is ensuring that payments happen on time by specifying and enforcing deadlines. Here’s what you should know about common invoice payment terms that you can put on sale documents, including whether or not these terms are legally binding for customers.
Most typical invoice payment terms
Payment terms and due date are popular fields on most invoices which, unlike receipts, are issued before the payment happens.
While it’s not a requirement to put payment terms on invoices (including VAT invoices), it’s a good practice to use them to make sure that the amount due arrives on time.
Businesses and organisations either put a specific date when the payment is due, describe particular conditions, or use one of the widely recognised terms and acronyms.
The most well-known examples of payment terms in the UK and the USA are as follows:
- DOR – Due On Receipt
- PIA – Payment In Advance
- EOM – End Of Month
- COD – Cash On Delivery
- Net 7 – 7 days after the invoice date
- Net 10 – 10 days after the invoice date
- Net 15 – 15 days after the invoice date
- Net 30 – 30 days after the invoice date
- Net 60 – 60 days after the invoice date
Note: The word “net” in this case means “total after all discounts” and the number stands for the number of days. For example, “Net 7” means that the total amount on the invoice is due within seven days from the invoice date.
A common practice would be to combine some of these phrases, such as “net 30, end of the month” which means that the amount is expected 30 days after the end of the month when the invoice was issued.
While these terms are generally understood, it may be a better idea to describe the deadline in a full sentence, for example: “Payment is due within 10 working days from the invoice date”.
You can customise payment terms and due dates
Using invoice-specific terms or acronyms instead of, or in addition to, due dates can simplify and speed up business processes. Therefore, in many accounting systems, such as QuickBooks Online, you can either select a due date or choose one of the predefined terms based on a period or a specific day of the month. Default invoice terms in QBO are as follows:
- Due on receipt
- Net 15
- Net 30
- Net 60
QBO users can customise preferred invoice payment terms in the QBO Settings menu accessible here: Gear icon >> Account and Settings >> Sales >> Preferred invoice terms.
In this section, you can either choose one of the predefined terms (explained earlier) to make it default for all sale invoices or add custom terms. When you decide to customise payment terms, QBO will let you choose the name, select in how many days the full amount is due, select a fixed date, or apply the discount when the invoice is paid early.
For comparison, Xero users don’t get a list of customisable terms, but, instead, Xero invoices include a text field where users can type in a specific description.
Are payment terms legally binding?
Last year we reported that as much as 47% of UK companies admit to paying their suppliers after the agreed terms. The study also mentioned that 16% of respondents said that one-fifth of their transactions were never paid on time, and one in twelve respondents said they didn’t even monitor the process.
It seems that not paying attention to deadlines is quite tempting for many businesses. But more importantly, it makes you think that not keeping invoice payment terms have little to no consequences, which is not true.
Bear in mind that invoice payment terms are legally binding if they’re part of the transaction’s terms and conditions that the companies agreed on.
According to Hilton-Baird Collection Services, paying after agreed terms have several consequences including:
- Opening a country court case (“small claims court”) that may be preceded by meditation services
- Being listed in late payers’ name and shame campaigns, for example, “The Hall of Shame” by Forum of Private Business
- Losing credit rating
- Damaging supply chains, which makes future transactions between the two parties a lot harder to complete
Extract payment details with arbitrue
Arbitrue extracts due dates and paying methods from your expense-related invoices. You can export this information directly to your QuickBooks records or Excel files. Click the button below to try it now.