At FreshBooks, we compared different invoice payment terms to learn the impact they had on likelihood and time to get paid. We looked at our data around invoice payment terms. Our goal was to see if we could extract some insights that might really help FreshBooks customers get paid faster using our own small business invoice 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: We’ve looked at how long it takes to get paid based on the wording used in the Terms field on an invoice (e.g. “Please pay within 21 days” or “Invoice 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. invoice payment terms used (the data points in the top section of the graph). On this scale, higher is better. Another way of thinking about this: 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).
So, what did we learn? Here are some key takeaways that you might find useful to apply to your own invoice terms:
1. Always Be Polite
The first thing we noticed in the data is that when it comes to invoice payment terms, 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. Politeness not only gets you paid faster — it’s good for your brand and image.
2. Give 21 Days to Pay
The second thing that leapt out is that using the word “days” as opposed to “net” will get you paid more often and faster. While the words “net 30” or similar may make sense to most business owners, it’s possible that kind of wording is not as clear to less business-savvy clients.
Another point we found interesting is that most people seem to interpret “upon receipt” as being open for interpretation. Using exact 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.
3. Charge Interest On Late Payments
Think of it as a stick-and-carrot approach. Yes, be polite (carrot). But don’t be afraid to show there’s a stick too! Advising your clients there will be interest charged on late payments 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.
With FreshBooks, make it convenient to get paid by:
- Enabling online payments: Sit back and watch the money get added to your bank account automatically. Accepting credit cards on your invoices is fast, safe and easy. Click here to learn how.
- Turning on Reminders and Late Payment Fees: Even the most reliable clients forget the occasional invoice sometimes. By setting up Reminders and Late Payment Fees, you’ll let FreshBooks do the nudging so you can get back to doing what you love. Click here to learn how.
We believe it’s worth taking a close look at your invoice payment 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 these recommendations and see if it makes a difference.
Of course, with all this said, the very best thing you can do to get paid more often and faster is to delight your customers with a quality product every single time. That, plus good manners and convenience, will make all the difference.