Invoices are a common part of doing business. If you’re purchasing an item from someone, they will provide the invoice with the terms for making payment. This article will explore the terms for when you’re going to be paying someone.
We’ll discuss two main types of invoices: the ones with payment terms that are discussed in advance and the ones where payment is due on receipt.
In general, there are two types of business invoices: Payable on Receipt or “Net 30”. Let’s dig in!
Net 30
Net 30 payment terms mean the invoice is due thirty days after receipt. While 30 days is the standard, it could just as well be 60 days (i.e. Net 60) or 90 days or any other time period agreed in advance.
This type of terms facilitates prompt payment and will largely appeal to smaller businesses. The larger a business and less cash flow it has, the more likely it is to want longer payment terms so as to avoid premature depletion of funds in waiting for payments from customers.
Net 30 provides enough time for disputes or payment delays without affecting your cash flow and the ability to pay other bills that may come due before the customer pays his/her debt. Larger firms that have larger accounts receivable need this kind of buffer in order not to put undue pressure on their short-term cash flow.
Payable on receipt
The invoice is payable on receipt with the seller holding title to the goods until payment in full is made. When the invoice is paid, ownership of the goods passes to you.
This type of payment terms means that if you order goods from a supplier and they send an invoice with Payable on Receipt as the terms for paying them, they have effectively put a lien on your goods until you pay them. You can’t use or sell the goods until you pay them.
If you don’t have the means to pay for your invoice on time, ask the supplier if they’ll accept a partial payment with an agreement to pay the rest later.
Examples of common terms for invoice payment
It’s important to know the terms of payment before entering into a contract. Terms can differ depending on the type of business and where it is located.
These are some common terms specified for invoice payments.
Interest fees: If you’re late in paying your supplier, there can be interest charges added to the invoice amount (if there aren’t already).
Penalties: In some cases, if your payment is late by more than 30 to 60 days or more, there will be penalty fees or even termination of your contract to sell your products/services to them.
Late fee: If for any reason, you are unable to pay within the agreed time, you may be assessed a late fee. Keep in mind that if you’re receiving an invoice and the terms are not stated, it’s your responsibility to ask about them.
Returned Goods: If you don’t pay your invoice in a timely manner, some suppliers may not allow you to return or exchange any defective items.
Credit deposits: Depending upon your credit history and your firm’s history with a particular supplier, they may require you to deposit funds for the invoice before delivery or performance. This is done as collateral against lost items, mistakes in delivery or shipping errors.
It’s important that both parties understand payment terms so that expected cash flow issues don’t arise. A well-drafted invoice will have all of these things clearly stated.
Be mindful of the payment terms for all invoices you receive
Invoices need to be paid promptly. When invoices aren’t paid on time, this can cause cash flow issues for the company or individual trying to do business with you.
The consequences of not paying an invoice by its due date include the company receiving the invoice getting hit with penalties, termination, and interest fees. If a business pays an invoice late, this can cause cash flow issues for them in the future.
If your company doesn’t pay its bills in a timely manner, it will find it difficult to get credit from suppliers of goods and services going forward as well as have difficulty attracting customers who may wish to purchase items on credit.
