What Are Payment Terms?
Payment terms specify when and how a client should pay your invoice. Good terms set clear expectations and provide legal protection for your business. Good payment terms prevent misunderstandings and encourage prompt payment.
What Are Invoicing Terms?
You should also clarify invoicing terms. This won't go on your invoice, but it should be communicated to your client. Are you going to send them invoices weekly, monthly, or at the end of the project? Some clients prefer smaller, frequent payments. Some clients have a monthly fiscal cycle that's easier for them to work with. Still others won't get the budget for the project until after it's completed. Clarifying this detail will prevent uncomfortable conversations.
Common Payment Terms
- Net 45 - Payment must be complete within 45 days.
- Net 5 - Payment must be complete within 5 days.
- Due on Receipt - Payment is due as soon as the invoice is received.
- 2/10 Net 30 - 2% discount if paid within 10 days, otherwise due in 30 days.
- 50% upfront - Half payment before work begins.
Pro Tip
Net30 or Net45 payment terms are the same as making an interest-free loan to your customer. You have to continue operating, even though you don't have those funds yet. Unless there is a specific reason to extend terms, expect payment immediately, or at most within 5 business days. In some industries, it's common for it to take 30-45 days for payment to be arranged, but for freelancers, the amount of money we're talking about should not require more than 24 hours to transfer.
Choosing the Right Terms
Consider these factors when setting payment terms:
- Industry standards - What's normal in your field? Although it's normal for freelancers to get paid on Net30 terms, it only benefits the customer at the cost of the freelancer.
- Project size - Very large payments may need smaller, intermediate deposits. Schedule these so that they happen throughout the project instead of waiting until the project is complete.
- Cash flow needs - If the project requires you to hire personnel or purchase equipemnt, you may need cash up front to even begin the work.
Payment Methods
Specify how clients can pay:
- Bank transfer - Do not include account details on your invoice. Arrange for another secure way to communicate to your client your bank account and routing numbers.
- Check - Provide a mailing address and "made out to" details. Also, if you want a cashier's check rather than a personal/business check, specify that.
- Online payment - Specify the service (PayPal, Stripe, etc.) and the handle they can use to find you.
- Credit card - If you accept credit cards, they're the best way to take payment. Point your customer to the right portal for using a credit card to pay their bill.
Important
Always include your payment terms on every invoice. Don't assume clients remember terms from previous conversations or contracts.
Late Payment Policies
Consider including:
- Late fees - "5% fee if not paid on due date. Additional 5% fee for each 5 business days thereafter."
- Interest charges - Check the laws in your state/region. Most jurisdictions allow you to charge interest on late payments, but not all.
Sample Payment Terms
Example 1 (Service Business):
"Time and Materials will be invoiced weekly. Payment is due within 5 business days of invoice date. Late payments are subject to a 1.5% monthly service charge. Payment can be made by check, bank transfer, or PayPal."
Example 2 (Project Work):
"50% deposit required to begin work. Remaining balance due within 15 days of project completion. 2% discount available if final payment is made within 5 days."