How to go about setting payment terms for your business

You’re not alone if you find yourself with unpaid invoices. Since COVID-19 hit, late invoice payments in the UK have risen by 23%. As a result, companies must consider more effective ways to ensure they’re paid on time to thrive post-pandemic and so that they maintain good cash flow.

One way to do this is to make your payment terms clear. We’ll cover the following areas to show you how to go about setting practical payment terms for your business:

• What are payment terms?
• How do I decide payment terms for my customers?
• Where do I include payment terms?
• What do I do if a customer goes over the payment term?

Payment terms are the details of how you would like your customers to pay your business for the products or services you provided. 

The payment terms will first refer to the time frame in which you need to be paid. The ‘term’ or period of time the customer has to pay can be up to you. For example, in the UK, the law is that customers have to pay invoices within 30 days of a business providing a product or service. If the client pays later than this, you are entitled to add interest to the total amount due. 

Part of your payment terms is how you will accept payment. For example, some acceptable payment methods might be:

• Cash
• Debit or credit card
• Cheque
• Online transfers
• Other types of currency (either international or cryptocurrency)

You might choose to deal only in online payments, as this can be quicker and more convenient for both you and your customer and might save you from dealing with any cash accounting.

The last thing you should consider as part of your payment terms is if you will charge interest on any late invoices. Charging interest on late payments is part of the terms and conditions of a customer working with your business, and if an invoice is still unpaid after 30 days, you have every right to charge late penalties if you choose. We’ll look at how you can do this later on. 

You can set your terms at 30 days if you so wish, or you could also choose a shorter or longer payment term if you think it would be more beneficial for your customers. 

For example, if you offer online payments, there’s no reason you can’t ask to be paid within a couple of weeks, as the customer has a fast and easy way of paying. You won’t be able to add interest until the invoice is unpaid after 30 days, though. 

As another example, if you deal in high-value transactions or expensive products, you could offer an extended payment term or even create instalment payments if you choose. But bear in mind that the longer your payment term, the longer you might wait to receive the money from your customers, which could affect your cash flow.

You could also take a customer by customer approach. For example, if your client says they might struggle to pay quickly, or you do ongoing work for them which will require several invoices, then you could make arrangements for their needs. 

You should always include your payment terms on every invoice you issue.

Each invoice should have a breakdown of the costs and the final total. Underneath this information, you should write your payment terms. Start by clearly stating how much time the customer has to pay the invoice. Include the ‘term’ whether it be 30 days or a shorter/longer amount of time if you have agreed that with the customer. Next, add a ‘Due Date’ in bold to make it very clear what date you expect your customer to have paid.

Then you should include how they can pay the total by listing your accepted payment methods. Then have the details of how to pay, including banking details or the name they should make a cheque out to. 

Then finally, include the disclaimer that you will be charging interest on any late payments that are unpaid after the due date.

It’s also a good idea to discuss payment terms when you make a sale so that all involved parties understand the expectations.

If you have chased the customer after the due date and still have not received word of when they will pay, then you can start to charge interest to the unpaid invoice if you choose. 

You can start charging what is known as ‘statutory interest‘, which is 8% plus the Bank of England base rate.

So, for example, your unpaid invoice is £500. You’d first check what the Bank of England base rate is at that time. Say the base rate is 0.5%, you’d be charging 8.5% interest on the £500 payment. 

So first, calculate the annual statutory interest you can charge. This calculation would be:

£500 multiplied by 8.5%

500 x 0.085 = 42.5

So the annual interest you’d be allowed to charge is £42.50. Now divide that by 365 (for each day of the year) so you can figure out how much you’d be charging for interest daily.

£42.50 ÷ 365 = 0.11

Now you’d total up the number of days the invoice has been overdue. So say it’s one month after the initial 30-day deadline. You could charge 31 days worth of interest, so that would be:

£0.11 x 31 = £3.41

You would then issue a new invoice with the added interest on the total value the customer must repay.

Financial management can be stressful and time-consuming when you’re self-employed — that’s why thousands of business owners use the Countingup app to make their invoicing admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

Not only can you issue invoices at the touch of a button, but the app will also reconcile them automatically for you when they are paid. These features could save your hours of admin and let you get back to doing what you do best — running your business.

Find out more here.