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Factoring: Invoice payment terms - and how to have them abided by
Businesses may arrange many kinds of invoice payment terms to decide when the invoice will actually get paid. Typical invoice payment terms may be classified into three broad categories - or be a bit more tailor-made. But no matter what terms have been designed, the real issue is to have these terms abided by, so there’s a few tips to make sure invoices will get paid “on time”, whatever “on time” means.
Typical invoice payment terms
Standard payment terms or cash payments are the most widely used invoice payment terms. Other possibilities include different types of involvement by banks, or even more creativity.
Standard payment terms
Terms involving payment at a specific absolute - calendar day - or relative time - after the invoice has been issued - are the most common.
- Advance payment is known as “PIA”;
- payments (X) days after invoice date are known as “Net X”, for example “Net15” for payment 15 days after invoice date;
- end of month payments as “EOM”;
- payments on the (X)th day of the month as “X MFI”, for example “25 MFI” for payment on the 25th day of the month following invoice date.
Cash payments may also take different forms:
- “CIA” stands for Cash in advance;
- “CBS” for Cash before shipment;
- “CWO” means Cash with order;
- “COD” Cash on delivery;
- “CND” stands for Cash next delivery.
When banks get involved
Businesses may ask banks to provide different type of guaranties or support to facilitate payment:
- A “bill of exchange” is a promise to pay sometime in the future, and is usually supported by a bank;
- a “letter of credit” is typically used for export, and relates to a documentary credit confirmed by a bank;
- a “cash account” may be used to process payments on a cash basis, without credit.
Some lesser-known invoice payment terms include:
- Stage payments are payments of agreed amounts at agreed stages;
- Discounts for payments made on or before a certain time: “2% 7 Net 30” will mean there’s a 2% discount on the invoice value if payment is received within seven days, if not, payment of the full invoice value will be due 30 days after invoice date;
- Contra Payments can be arranged between businesses which both owe money to each other - the value of what B owes to A will then be deducted from A’s invoice.
Tips to get paid faster
Invoice payment terms are usually not the whole story when businesses have to get paid, and some customers will just pay when they want. Here are a few tips to make clients pay when they are meant to.
Plan ahead and settle invoice payment terms in advance
Agreeing payment terms in advance is a strategy to pre-empt cash flow discrepancies. When a client insists on enjoying very long payment terms, you can still use tactics such as allowing price discounts for early payments or enter factoring or invoice discounting agreements.
“KYC” - Know your customer
It is an often overlooked part of any business to actually build a sound relationship with all clients. Money needs to be discussed at other times than contractual negotiation, during the whole contractual period. A few courtesy phone calls may go a long way in getting invoices paid faster...
Review your invoices again
Invoices have a few formal obligations. It’s just silly to allow clients an excuse for late payments if invoices are not fully legit and take longer to process.
Avoid heavy-handed collection methods
It’s a wrong strategy to be immediately offensive as soon as payment deadline is passed. This is especially true for small companies, which don’t understand how complex can the organisation of big corporations be.
Get help from online vendor portals
Online vendor portals can be used to submit invoices online and check the status of every payment.
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