Invoices are often the first and sometimes the last document that goes to the client. So, we must make a good impression while sending invoices. Apart from the mandatory things such as client name and item details, an invoice should contain various other important elements.
One of the elements is – payment terms and conditions.
When it comes to starting a business or managing an existing business effectively, the most critical element is setting the invoice payment terms and conditions clearly.
Ironically, it is the least bothered part as well. Though all businesses set their payment terms and conditions, they are not drafted properly on invoices. As a result, operational issues like- poor payments from clients, legal implications, unwanted payment follow-ups, and many such problems may arise.
Many a times, even after drafting terms and conditions on sales invoices, an entrepreneur faces issues. It happens due to the lack of proper or incomplete drafting of standard terms and conditions.
In this article, we’ll see how to write standard invoice payment terms and conditions while sending bills to your clients. Also learn about the important elements that must be covered like warranty, advance payments, return policy, late payment fees and much more. We’ll look at the best practices for writing terms along with some examples.
Need for Terms and Conditions on Invoices
It’s not just that the situation becomes troublesome for the businessman or the service provider, the client also goes through a poor experience. Clearly defined terms and conditions bring clarity in many aspects for both the parties:
1) Better Understanding
When terms and conditions are defined, the service provider keeps the payment terms clear. For example, it becomes easy to understand whether the payment can be made by credit cards or not. Or, for that matter, what is the penalty if the payment is delayed.
2) Governing Laws
It also specifies the jurisdictions and governing laws and authorities in case of any disputes in payments.
3) Smooth Operations
When the period of payment or the terms are defined, the client is aware of the time duration by which the payment needs to be settled. Similarly, the entrepreneur plans her budget according to the due payments which help her circulate the money in the business, critical to her profitability.
4) Consequences in case of Non-Compliance
The standard terms and conditions define the consequences of non-compliance in payments. For example, in case the payment is delayed, an interest of 10% per month is chargeable.
Best Practices for Writing Invoice Terms and Conditions
There are many small and critical aspects of writing a good and complete terms and conditions on sales invoices, such as:
- Use of simple, polite, and straightforward language.
- Mentioning the complete details of the firm and the client.
- Complete details of the product or service, including taxes or discounts.
- The reference number or invoice number.
- Mentioning the payment mode.
In addition, there are best practices which when followed or used can make things simple and faster. These are:
1) Terms of Sale
Clear demarcation of terms of sales will wipe-out any potential chance of misunderstanding or disagreement from any of the parties. Hence, it is of utmost importance to mention the terms of sales like- cost, quantity, single unit cost, delivery date or time of service, payment method or credit, if any.
This is most important during cross-border transactions or deals. Mentioning the “responsibility” of international taxes, duties, or any other regulation makes the payment process trouble-free.
2) Payment in Advance
It is one of the most usual payment terms, where the service provider asks for full or partial payment before the delivery of product or service. This is prevalent in the service industry and is followed to avoid after-sales non-payment recovery. It is practiced to avoid out-of-pocket expenses to finish the project.
Usually written as “PIA”, it must be incorporated if followed by the business firm and similarly, the client ought to look out for such things mentioned on the deal.
3) Instant Payment
The service provider demands the payment immediately after the delivery of the product or service. It is often referred to as “Cash on Delivery” (COD), or sometimes Payable on Receipt. In the absence of adherence to the term, the deal or delivery is taken as canceled or void.
Mentioning this term or condition is important as the client may be annoyed if such a condition is not mentioned.
4) Net 7, Net 10, Net 30
There are terms for advance payment when the client is offered credit. It is mentioned as “Net 7” or “Net 30”, which means pay the due after seven or thirty days of the date of the sales bill. The term makes it clear to the client “when the payment is due”. But, sometimes, it can create confusion if the “term” is not clear to him. It is hence advised to put it across in one of the other precise ways like- “Please make the payment after 7 days of the date of invoice” or simply “Day 7”.
Many-a-times incentives are offered to the client in order to pre-pone the payment by putting in as “2/5 Net 7”. It stands for- “pay in five days and get 2% discount”. Avoiding such representation and writing “please pay within five days and save 2 percent” makes a better impact.
5) Warranty Terms
The invoice must illuminate the terms of warranty of product or service and must specify the number of days after which the warranty is not applicable. It should also state when the warranty stands void and/or clearly mention that warranty doesn’t mean the return of the product. The warranty terms and conditions must be attached to the invoice. Commonly used terms and conditions of warranty are:
- Products damaged during the transit will not be covered under the warranty.
- The product carries a 90 days warranty unless otherwise stated.
- The product carries only manufacturer’s warranty and no return or exchange will be entertained.
6) Return or Replacement Policy
Any small business must incorporate the return policy, especially if it is in retail. The number of return or the refund policy will decide the popularity of your product or services. At the same time, you may safeguard yourself from faux claims and orders.
These terms will also reduce your probable losses due to returns or refunds. Some of the sample terms and conditions which can be incorporated into your retail invoice are-
- All products returned for refund/replacement or extended on credit must be returned in “saleable” condition with original packing.
- 10% restocking charges are applicable on all non-defective replacements.
- In case of a damaged product or item received please contact our toll-free number-1800-328-XXXX.
7) Late Payment Penalties
To better the relationship between the supplier and the customer, it is of utmost importance to educate the customer on overdue payments and their subsequent consequences. There is no harm in mentioning the late payment conditions in your agreement as –
- They remind the client of the due date.
- Compensate your financial cost due to delay.
- Improves the overall payment time and process.
Few examples of terms & conditions in a polite manner are:
If any invoiced amount is not received by the company, by the mentioned due date, then without limiting company’s rights, the following will be applicable.
- Those charges may accrue late interest @ 2% of the outstanding balance per week, or the maximum rate permitted by the law, whichever is lower.
- We may condition future contract renewals/service renewals or suspend our services to you until such amount is paid in full.
Basic Terms to Keep in Mind
Few other terms and their short forms to be kept in mind are:
– EOM: End of Month
– CWO: Cash with Order
– CND: Cash Next Delivery
– CBS: Cash before Shipment
The difference between carrying out a good or bad business lays in the way you deal with your clients and customers. This stands true when you invoice. Ensure you are polite while drafting your invoice terms, keep them short and simple, clear in terms of rates and taxes, and offer more than one payment option.
Its strongly suggested to use a good invoicing software which can take care of invoice format. For example, in ProfitBooks, you can set the terms once and it will appear on all the invoices automatically.Start Creating Invoices With ProfitBooks