Recently, we looked at our data to see if we could extract some insights that might really help FreshBooks customers get paid faster using our own small business invoicing software. 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).
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.
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