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The best invoice terms to get you paid faster

invoice_terms
We compared different invoice terms to see what impact they had on likelihood and time to get paid.

Recently, we looked at our data to see if we could extract some insights that might really help FreshBooks customers get paid faster. Our question: how does the wording of the “terms” section of an invoice impact the number of days it takes you to get paid and the percent of invoices you actually collect on.

In the graph above we’ve mapped two key things gleaned from the data of our paying FreshBooks users. In the bar graph, we’ve looked at how long it takes to get paid based on various wordings used in the Terms field on an invoice (e.g. “Please pay within 21 days” or “Payment terms: net 30. Interest accrued at 1.5% per month thereafter”). On this chart of days to pay vs. terms used, the shorter the bar, the better.

The second thing we’ve charted is the percentage of invoices actually paid vs. terms used (the data points in the top section of the graph). On this scale, higher is better. Another way of thinking about this is: the wider the gap between the bar and the data point above it, the better the wording (in general, although there are a handful of exceptions).

Be Polite

The first thing we noticed in the data is that being polite really matters! A simple “please pay your invoice within” or “thank you for your business” can increase the percentage of invoices that are paid by more than 5 per cent! That could easily equate to thousands of dollars per year. Not only that, but politeness clearly gets you paid faster.

21 Days to Pay

The second thing that jumps out at us is that using the word “days” as opposed to “net” gets you paid more often and faster. While the words “net 30” or similar may make sense to most business owners, perhaps that kind of wording is not as clear to less business-savvy clients.

Another point we found interesting here is that most people seem to interpret “upon receipt” as “whenever you feel like it”. It’s as if they receive an invoice with the words “payable upon receipt” and immediately dump it into the “whenever” pile. Using specific terms such as “21 days” seems to focus the client’s mind around a specific timeframe and will actually get you paid faster than asking for immediate payment.

Interest On Late Payments

The final thing we learned from this chart is that threatening your clients with interest on late payments does two things. It gets you paid slower, but it also seems to ensure a higher percentage of invoices will get paid. Perhaps when your clients see an interest rate it gives them a mental excuse to prioritize other debt payments like credit cards versus your invoice, but at the end of the day they don’t want to push it too far, so they end up paying. In their minds there is always a chance that you won’t apply the extra 1.5% if they are “only” a month late.

So what does this exercise tell us about the optimum payment terms for your business?

We think it’s worth taking a close look at your invoice terms and perhaps changing them to something like one of these two options:

“Thank you; we really appreciate your business. Please send payment within 21 days of receiving this invoice.”

It’s polite, and includes the magical “21 days” formula.

Or, if you run a slim-margin shop where every dime counts, but cash flow isn’t an issue:

“Thank you for your business. We do expect payment within 21 days, so please process this invoice within that time. There will be a 1.5% interest charge per month on late invoices.”

Review the payment terms you’re using on your invoices (you can change the terms and set default terms when editing any invoice). Play around with the wording based on our findings here and let us know if it makes a difference.

Of course, with all this said, we know that still the very best thing you can do to get paid more often and faster is delight your customers with a quality product every time. That, plus decent manners can make all the difference.

More great ideas to grow your business

Discover how to make sure you get paid for your great ideas.

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  • jg

    how do you phrase that on you rinvoices?

  • http://www.freshbooks.com Amanda

    Hey JG!
    You can use the Default Terms feature to communicate terms like this on each invoice. To set Default Terms go to create or ‘edit’ an invoice and select the blue ‘Set Default Terms’ link near the bottom left of the screen.

    You can phrase it however you like. Usually something polite and straightforward like “Thank you for your business! Payment is due within 30 days of receipt. A 5% discount will be applied if payment is received within 5 days. If payment is not received within 30 days, a late payment fee of 10% will be applied.”

    Hope this helps :)
    Amanda

  • http://www.happiness1st.com/Programs Happiness 1st

    Highly unlikely that this would be effective.
    #1 – Employees would choose a different vendor.
    #2 – If the employer goes out of business the employee may be unemployed so an unlikely payment source

    You can do due diligence on the business before you do business to determine if you want to offer terms. Many regulated businesses must do this–in fact some of it is so ridiculous (as far as regulatory mandates) when I was in Compliance at the bank the regs required us to do due diligence on companies like A T & T and our internet provider. It was not like we had a choice of vendors and we were pretty confident they would not go out of business–but the regulators in their over-the-top CYA for business continuity planning required us to do due diligence anyway.

  • gravityseven

    Any idea how to credit back the 5% discount to my client ? i mean lets say i sent an invoice of 100 USD to my client, how i can apply the 5% discount assuming my client paid his invoice within 5 days ?

    note this should not complicate the payment process for both parties.

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  • Emily

    We always send a bill for substantial completion, basically we bill 80% of the costs when we are about 80% complete and hold off on billing a 20% retainage. We get the customer to sign a letter of completion and we send an invoice for the remaining 20% the same day.

  • Emily

    Also, for large projects, we send an invoice for starting the job, about 40%. Then send another invoice for 40% for substantial completion (when we are about 80% complete), and then send the remaining 20% invoice at the end of the job, after we have a signed letter of completion.

  • freelo

    Hi Tim, not sure what you do for business. Me as a graphic designer ALWAYS get down payments (usually 50%) for everything I do, don’t even start working before you get the check, and send the second invoice before deliverables are sent to the client… I really recommend it! Also, always make all my clients sign agreements before the project starts, this is another payment enhancer!!! Good luck!

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  • Daren

    I’m a Graphic Designer too. Although most of my work revolves around artworking and 99% of the time, it involves work requiring IMMEDIATE turnaround – “Oops – sorry for the late notice but I have a press ad that needs to be with the paper by 5pm and it’s 4pm now!”. No client in this situation is going to hand over 50% up front on a job like that. And as I said, this represents the main bulk of my business – I rarely work on project that aren’t required to be turned around for the same or next day. But I’m getting hit on the 30 day credit system and, with the new clients I have picked up recently who insist upon using it to its full extent (as well as exceeding it!!), I’ve yet to build up any momentum where I’m getting money in from client A whilst I’m waiting for money from client B. And I’m owed thousands! As a one-man business, struggling enough as it is, it’s not a situation I can maintain. These companies are BIG – they are Corporate animals for whom my bills are single drop in a massive ocean. But I’m being screwed over by the fact that the 30 day system is just not fair – it’s no wonder businesses are going down when the Government should be looking after them! I’ve tried insisting on my own terms (I tried 14 days), offering a discount for on-time payment (although why I should have to do that is ridiculous) and even suggesting interest on late payments – all I got from those clients was an ultimatum that if I wasn’t satisfied with the way things are, lump it and go elsewhere. So in short, there are occasions where you CAN’T get up-front payment. And that’s where it’s all wrong…


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