What You’ll Learn:
- Common payment terms and potential impact on cash flow
- How to choose the best payment terms for your invoices
- Why and when to notify clients about payment terms
For freelancers, completing and submitting a project isn’t the finish line. You still have to send your invoice for the work and, most importantly, get paid. The satisfaction of a job well done can be undermined by the looming reality that many business payments are delayed. This is an especially relevant concern for freelancers—74% have experienced nonpayment or late payment at some point in their careers.
Luckily, clear payment terms can minimize the chance of delays and make it more likely that you get funds when you need them. Similar to an instruction manual, these terms help clients understand how you accept payments and any conditions (such as a timeline) they need to keep in mind when sending your funds.
What are Invoice Payment Terms?
Simply put, payment terms describe the conditions under which you will accept payment from your clients. Think of these terms as your opportunity to set clear expectations about when and how your business expects payment.
Payment terms typically cover:
- How much is due
- What is the payment deadline
- Forms of payment accepted
- Any discounts for early payments
- Penalties for late payments
When it comes to choosing payment terms, your cash flow, the credibility of your client, and the type of work being performed will all have an impact on which policies are most advantageous for your business. For example, it might make more sense to stipulate that new clients pay half of the total upfront to hedge against the risk of nonpayment.
Regardless of the details, you should be clear and concise when sharing those terms—both in conversation with clients and on your invoices. Industry-standard language can help you be sure that clients understand your meaning, and that confusion doesn’t delay your payments.
The 6 Most Common Payment Terms
The most common payments terms you’re likely to see in use are:
- Payment in Advance
- Net 15 / 30 / 45 / 60
- Due Upon Receipt
- End of Month
- Stage Payments
- X% 10 Net 30
Let’s break down the mechanics of each payment term and talk through the key benefits and drawbacks.
Payment in Advance
Payment in advance is pretty straightforward. You’re asking clients to pay before work begins. Receiving payment in advance might be ideal for big projects that have a long timeline or when you’re working with a new client. This agreement protects you if a client is unable or unwilling to pay at the end of the project. Another benefit is that you get access to a portion of your earnings sooner, which can positively impact your overall cash flow.
Net 15 / 30 / 45 / 60
Service-based businesses (contractors, freelancers, etc.) often use net payment terms. Net payment means that full payment is due within the specified payment period—typically 15, 30, 45, or 60 days from the invoice date. In other words, if you send an invoice on January 1 with Net 30 terms, you would expect payment to be rendered by January 31. Shorter net terms, like Net 10, might be appealing to freelancers or small businesses that depend on steady, predictable payment deposits to generate income and stabilize their cash flow. Longer net payment terms might be more appealing to clients who want to defer payment, but they may create financial stress for you—particularly if you’re relying on income to pay other bills or reinvest in new skills for your business.
Due Upon Receipt
This term means that payment is due as soon as a client receives your invoice, typically no later than the next business day. If you determine that you want to request payment upon receipt, make it clear early in conversations with your client so there’s no confusion about your payment agreement when the invoice is delivered. You should also know that this could be a dealbreaker for some clients—they may be unable or unwilling to guarantee such a quick turnaround, and decide to go with a business with more flexible payment terms.
End of Month
End-of-month payments are due at the end of the month the client receives the invoice, regardless of the disbursement date. For example, if an invoice is delivered to the client on April 6 or April 16, the payment would be due on April 30 for both. End-of-month payment terms make it easy to organize earnings and resolve outstanding invoices at the end of each month. However, EOM payment agreements might be a tight turnaround for some clients, and you could lose out on opportunities with businesses that aren’t willing to commit to that deadline.
If a project is too extensive to be paid all at once, you can ask for stage payments. Under these terms, you’ll receive partial payment at different predetermined milestones while the work is ongoing. For instance, you might receive payments at three different milestones throughout the contract, each equalling 33% of the total cost. Breaking payments down into installments can be mutually beneficial for you and your client—you get access to your revenue in increments rather than waiting for a lump sum deposit in the distant future, while your client can pay off their debt in more manageable portions as work gets completed.
X% 10 Net 30
This payment term gives you a chance to offer clients a discount for paying in advance. ‘X’ represents the percentage of savings offered if they pay in ten days or less. If they skip the deal, the total amount is due in 30 days.
For instance, 5% 10 Net 30 on a $1,000 invoice means clients can pay $950 if they settle within ten days. Again, this option has some mutually beneficial aspects. There’s a clear advantage to getting paid faster, particularly if you’re dealing with cash flow sensitivities. And the discount helps your client save money if they can accelerate the payment timeline.
Why payment terms matter
Getting paid on time is crucial—especially for small businesses, startups, and sole proprietors that may not be able to weather gaps in cash flow. When you have clear payment terms, you can predict with greater confidence and accuracy when you’re getting paid. And if you know exactly when you’ll be paid, you can make better predictions about your cash flow.
But just slapping some payment terms on an invoice isn’t enough—particularly if you have payment terms that deviate from the norm or put greater urgency on your clients to meet aggressive payment deadlines. If that’s the case, it’s probably safer to reach a payment agreement before committing to the project. If you get into a relationship with a client who won’t be able to meet your terms, you’re setting both parties up for disappointment.
Choosing the best invoicing terms for your business
Now that you know the most common payment terms, it’s time to decide which ones to use in your business. There are multiple factors that can help you determine the best fit for you business, including:
Different industries have different norms regarding invoice payment terms. For instance, businesses in construction often ask for stage payments, while those in the professional services industry typically ask for Net 30 payments. You don’t necessarily have to go with the conventions of your industry, but doing a little upfront research can help you understand the expectations your clients might have around payments and give you a good starting point when determining what works best for you.
Larger companies tend to have sufficient cash flow that can accommodate a wider variety of payment terms. Alternatively, larger organizations may also have a standardized way of paying out freelancers and contractors, with inflexible policies when it comes to accommodating outliers. Smaller companies may not have a strong enough cash flow to meet aggressive deadlines or large lump sum payments. Payment terms aren’t worth jeopardizing the relationship or losing a client over. Try to strike a balance that suits your needs while also adhering to the payment systems and preferences of your clients.
Your cash flow
Shorter payment terms are probably best if you need money quickly. If you can afford to wait longer between each payment, more extended periods may work better and appeal to more clients.
Stage payments can work well for expensive invoices, while Due upon Receipt terms might be perfect for small projects with simple deliverables. Consider the amount of money and how urgently you need access to it when determining your preferred invoice terms.
Notifying your clients about payment terms
Customers appreciate clear invoice payment terms as much as you do. They don’t want to be hit with a penalty because they didn’t know how to pay. In addition, if you have to chase down invoices because clients are confused, it can damage the relationship.
Once you’ve decided on your terms, it’s essential to let your clients know about them. The standard way to do this is to include your payment terms on invoices. This is a great proactive step that can help avoid confusion about when payments are due or what form of payment is required.
You can also include your payment information in other places, such as on your website or in service proposals. If you do this, make sure that the information is clear and easy to find. If you’re open to other payment terms, include that information as well—you don’t want to miss out on an opportunity just because a client thinks you’ll be difficult to pay.
Want to simplify your invoicing process? Hopscotch can auto-generate branded invoices for your clients in a few clicks. Sign up today and start getting paid instantly with zero fees.