When you run a small business, it can be difficult to maintain a steady cash flow, especially if not all of your customers pay on time.
This is where having the right payment terms and conditions can make a huge difference to your bottom line. These details, which should accompany every invoice, inform customers in advance when payment is due, how you would like to be paid, and what the penalties are for late payment. They also confirm the particulars of the customer’s order so that misunderstandings don’t lead to a future dispute.
If you don’t have a payment terms and conditions sheet yet or your existing one needs updating, here are the top 10 things you must include for best results.
1. The products or services being provided
Clearly state what the customer will be paying for. Add more information if you sell products or services that are similar so that there are no misunderstandings. For example:
- Women’s trousers (black, wool)
- Women’s trousers (indigo, polyester)
2. The payment terms
When is the payment due? Depending on what type of business you run, you might specify that payment is due in 30 days, at the time of delivery, or even before you ship the product or perform the service. For examples of how to to set your payment terms, see our invoice templates here.
3. Early payment discounts
Early payment discounts can boost your bottom line by rewarding customers for paying sooner. If you offer a discount, be clear about when they can take advantage of it. For example, a 5% discount may apply if they pay a two-week (Net 14) invoice within seven days.
4. Overdue charges
Having a late payment policy reminds the customer of the due date and compensates you financially for any delay. You could state that interest accrues at (for example) 3% of the outstanding balance per week or that services will be suspended until the invoice is paid in full.
If you offer a warranty with your products or services, specify the number of days covered and what circumstances could void it. For example:
- The product carries a 90-day warranty unless otherwise indicated.
- Products damaged during shipment will not be covered by the warranty.
Since warranty issues are a common source of contention between businesses and their customers, this section of your payment terms and conditions must be completely clear.
If you need guidance on your warranty obligations, this page has a general overview for European businesses while this article provides guidelines for U.S. businesses. A legal advisor in your area can explain what warranty information you need to include.
6. Return or replacement policy
Not every customer will be satisfied with their purchase, so you want to have a return policy in place, especially if you run a retail business. To ensure good customer relations while protecting yourself from financial loss, you can include the following stipulations:
- A small restocking charge on non-defective returns.
- All products brought in for replacement or a refund must be in their original packaging and in a suitable condition for resale.
7. Delivery timelines
Indicate when the order will be shipped, so the customer will have a reasonable idea of when it will arrive. You could state, “Order will ship within two business days of confirmed payment” or “(Product type) ships every Monday and Thursday.”
8. Account cancellation
If you run a subscription-based business, your payment terms and conditions should include an account cancellation clause stating that the customer may cancel their accounts with appropriate notice (e.g., 30 days) but will remain responsible for payment until the current subscription period ends.
9. Governing laws
You need to specify which governing laws will prevail if there is a dispute about the transaction or payment later on. Depending on where you live, this could be a state, province, region, or entire country. For example, if you live in the U.S., you could indicate that your payment terms and conditions will be enforced by the laws of your state, while if you live in the UK, you should specify that UK law has jurisdiction. This page has some sample governing law clauses that you can adapt for your use.
You know what ‘Net 7’ or ‘instant payment’ means, but don’t assume that your customers do. Include a definitions section that explains these and other terms.
Q. What are common payment terms?
- Most business use one of the following payment policies:
- Net 30, 60, 90: The customer must pay within 30, 60, or 90 days after the invoice date. Most small businesses go for a maximum of Net 30, but if a lot of money is involved, you can set a longer deadline, so your client has more time to come up with the cash.
- Payment in advance: The customer makes a deposit or pays in full before you fill their order. If you are a freelancer working with a brand new client, this payment term ensures you have the money upfront in case they disappear mid-project.
- Line of credit payment: Larger businesses may give their customers the option of paying their invoices monthly or quarterly, provided they are found credit-worthy.
- O.D: Short for cash on delivery, it means that payment is due at the time the client receives the product or service.
Q. What are common terms of sale?
- It’s essential that you use clear and commonly-understood terms of sale so that there’s no ambiguity. Terms like quantity, cost per unit, delivery date / service time, and payment method must be clarified. If you sell to overseas customers, you’ll also want to mention taxes, duties, and any applicable regulations.
Q. What is a recurring invoice?
Recurring invoices are scheduled payments made to a customer’s credit or debit card. They are used for ongoing services such as monthly social media marketing or for subscriptions.
Customers who pay late (and sometimes not at all) are a fact of life for any company. However, with the right payment terms and conditions in your invoice, you increase your chances of being paid on time and in full every time.