6 Importance of Including Payment Terms in Invoice Bills for Small Businesses

Source: paysimple.com

The goal of almost every person in business is to deliver a great job and also get paid when due without any delays. Because after all, why would anyone want to be in business if not to generate revenue? And how can this revenue be generated if clients do not pay when they should and how they should do so?

It is because of the need to eliminate any form of confusion during payment processes that business owners are advised to incorporate payment terms into their invoices. This is to ensure that the client understands the terms surrounding the payment of the service rendered, how the business intends to get paid and when the payment is due.

Different businesses include different types of payment terms in their business dealings and it is not peculiar to just one business. The criteria included in the payment terms are solely dependent on the business owners or team.

What are Payment Terms?

Source: essentialaccountingsupport.com

Payment terms are agreement or criteria that is included in a payment contract that indicates the preferred payment choice of a business and also the due dates for payment. The payment terms are usually included in the invoice and contain detailed information about how the business expects to get paid, when the business expects payment and when will be considered as overdue or late payment which could sometimes incur extra charges.

It is important to clearly state the payment terms in the invoice document to ensure that the client and the business are on the same page. The payment terms can be added seamlessly within the invoice using a free online invoice template. It also helps the client understand how the business’s preferred payment criteria work and eventually how best to work with it to avoid unknowingly defaulting in any way.

Most times some clients fully ignore to respond to invoice notifications and make late payments instead which could totally disrupt the business operations of the business and could even lead to more stress and disorganized business functioning. This is because if revenue does not come as expected and when it is expected, it can greatly impact the way in which the business operates and lead to more expenses or expenditure overlay.

A report by Shopify indicated that about 82% of small businesses close down their business due to poor cash flow management out of which poor payment of clients plays a huge role. With such staggering statistics, little wonder most small businesses struggle to survive and grow as well as they should.

Importance of including Payment Terms in Invoice

Getting paid on time is one of the most important things for every small business owner and the best way that can be achieved is by incorporating payment terms. There are several reasons why payment terms ought to be included in an invoice, some of the most important ones include

It helps the business owner to get paid on time

Although not every client needs stringent terms to get them to pay for services on time. But there are other clients that might not be so inclined to pay up on time and incorporating payment terms helps to give that extra push to make early payments as the business owner wants.

It is in a bid to get paid on time that some business owners include late payment fees. Late payment charges have proven to be effective in promoting early payments for business owners since no one likes to incur extra charges to their bills.

It helps the business owner to plan their revenue and taxes

Receiving payments on time from clients is also very important for a business owner to better organize, plan arrange for restocking if need be, and clear out debts also in a timely manner. If the business owner is paid on time, then supplies can be gotten on time and the business can run more smoothly with less stress.

But if there are concurrent late payments, then the business might move at an, even more, slower pace than it ought to. If the revenue projections are correctly calculated and the clients pay up within the stipulated time, it also helps the business owner to effectively plan and calculate taxes due, including salary payments and other factors necessary to keep the business running smoothly.

Clear payment terms ensure that the client and business owner are on the same page

Clearly indicating payment terms in the invoice helps to ensure that the business owner and the client are on the same page. It also helps to avoid unnecessary disputes as the preferred payment terms are clearly indicated in the invoice for both parties to understand and follow through.

What Should be included in the Payment Terms

Source: legalzoom.com

Payment terms include some key important details to ensure that the terms are complied with and avoid any form of disagreements. Some of these important details include

1. Invoice date

The invoice date is an important metric to include when drafting the payment terms in the invoice sent to the clients. The date plays a very important role in the invoice, and not just to specify the date in the invoice but it also serves as an indicator of the date on which the invoice was sent out and can be used to determine when the payment will be overdue. The date also helps the business to track how long the invoice was sent out and when to start including late payment charges.

2. Invoice number

The invoice number helps both the business owner and the client to arrange or sort out the invoices in chronological order. Asides from being important in sorting out the invoices sent out, the invoice number helps in the identification of invoices rather than randomly searching through them.

The invoice numbers are made to be unique to each invoice in a pattern that is agreed on by the business, therefore no two invoices can have the same number. In a case where a particular invoice is needed to either clarify a misunderstanding or check for more details, the invoice number helps the business owner and the client easily identify the invoice.

3. The total amount for the service

The total amount due for the client is vital to indicate in the payment terms. This is also to make things easier for the client by organizing and clearly identifying the total amount payable for the service. A detailed outline of the services offered and the price is followed by a total of everything that’s expected to be paid.

4. Expected payment date and period of time payment are expected

The payment terms ought to also clearly indicate the date that the client is expected to pay and if in the case for whatever reason the client happens to miss the expected payment date, the allowed grace period. These details are important to clearly include in the payment terms because sometimes clients are not aware of these terms, they could default unknowingly, creating unintentional issues.

Asides from that, some clients use this important information in their planning and budgeting so the business is paid for its service and both parties are happy.

5. Deposits or advance payment amounts required

This does not always apply to every business, but some business owners allow specific amounts or percentage deposits or advance payments. When an invoice is sent out, some businesses tend to be considerate and include flexible allowances such that the client can make a percentage deposit or pay in installments in certain preferred amounts.

However, this does not apply to every business as others prefer to be paid in full and not in installments.

6. Preferred payment methods

Including a preferred payment method should be one of the most important pieces of information to include in the payment terms. Some business owners make the mistake of including just one payment method which is not advisable because in the case of an error in making the transaction, the client would not have any other means of payment to try out. It is also generally more convenient when there are multiple payment options included in the invoice.

Common Payment Terms Small Business Owners should know

Source: businessnewsdaily.com

Communicating clearly is important but in payment terms, there are some essential terms to understand so they can be used accordingly.

S/N Payment term Meaning
1. PIA Pay in advance
2. CWO Cash with order
3. COD Cash on delivery
4. CIA Cash in advance
5. CND Cash next day
6. EOM Payment is due at the end of month
7. CBS Cash before shipment
8. Net 7, 10, 15, 30, 60 or 90 Payment is due 7, 10, 15, 30, 60, or 90 days after invoice date.
9. 21 MFI Payment should be made on the 21st of the following month. MFI stands for a month following invoice.
10. Upon Receipt Payment should be made immediately client receives the invoice


Payment terms helps business owners get paid on time for their services and also indicate if there are any late payment fees that are charged by the business. It is also very important for a business owner to receive payments from customers on time, so that he or she can better organize, plan for restocking if necessary, and settle past due debts.