Invoices or invoice creation are mandatory by the Government of India under GST laws. While making these invoices you have to take a lot of things under consideration.
One of these key elements is- The invoice 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.
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 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 invoice payment 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
Its not just that the situation becomes troublesome for the businessman or the service provider, the client also goes through a poor experience. Clearly defined Invoice payment terms and conditions bring clarity in many aspects for both parties:
1) Better Understanding Of Invoice payment Terms and conditions.
When terms and conditions are defined, the service provider keeps the payment terms clear. For example, it becomes easy to understand whether a credit card can make the payment or not. Or, for that matter, what is the penalty if the payment is delayed?
2) Governing Laws
Under the GST law, all businesses must create invoices. If your invoice terms and conditions are written properly, you can use them if your clients refuse to pay or defraud you or your company.
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 helps 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 Payment Terms and Conditions
There are many small and critical aspects of writing good and complete terms and conditions on sales invoices, such as:
- Use 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 a 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 in 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 to pre-pone the payment by putting in as 2/5 Net 7”. It stands for pay in five days and get a 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 the warranty of the 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 mention that the warranty doesnt 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 transit will not be covered under the warranty.
- The product carries a 90 days warranty unless otherwise stated.
- The product carries only the manufacturers 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 returns 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.
A 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 the companys 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 an amount is paid in full.
Basic Terms to Keep in Mind
A 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 lies in the way you deal with your clients and customers. This stands true when you invoice. Adding invoice payment terms and conditions will not only give you and your client clarity but also act as a security net, in case of fraud.
It’s strongly suggested to use good invoicing software that 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
Can I customize my invoice terms and conditions?
Yes, you can customize your invoice payment terms and conditions to suit your specific business needs and preferences. You can also customize your invoices with the use of Accounting software like ProfitBooks.
What should be included in my invoice payment terms and conditions?
Typically, invoice terms and conditions should include payment due dates, accepted payment methods, late payment penalties (if applicable), any discounts offered, and dispute resolution procedures.
How can I ensure prompt payment from my clients?
To encourage prompt payment, clearly state the payment due date on your invoices, provide convenient payment options, send timely reminders, and consider offering incentives for early payment or charging late payment fees.
Can I charge interest on overdue invoices?
Yes, you can charge interest on overdue invoices. However, it’s important to check the legal requirements and regulations specific to your jurisdiction to ensure compliance.
How should I handle invoice disputes?
Include a clear dispute resolution process in your terms and conditions. This may involve providing contact information for dispute resolution, such as a designated representative or a specific department, and outlining the steps to follow in case of a dispute, such as mediation or legal action.