Freelance Financials: Common Invoice Payment Terms You Need To Know
As a freelancer, you need a certain amount of business knowledge to make your solo venture a success. While you may not be an accountant or have any accounting background, you still need to know how to invoice correctly to ensure that you get paid prosperity, and on time.
This is where invoice payment terms come in.
Every freelancer needs to understand common payment terms to ensure that invoices leave no room for ambiguity. The more concise and clear your invoices are, the more likely you are to get paid on time. Plus, if you need to follow up on a late payment, you can quickly point to your payment terms to validate your claim. With that in mind, let’s take a closer look at payment terms so that you can create invoices that get you paid promptly.
What are Invoice Payment Terms?
Invoice payment terms are instructions that let your client know exactly when they’re expected to pay you. This works differently depending on your business model. Some freelancers require immediate payment, others require a deposit and the remainder on delivery, or they allow their clients to pay in instalments.
Whatever your agreement with your client may be, you need to explicitly state these terms on your contracts and invoices if you want them honored.
Why are Payment Terms so Important for Freelancers?
Unlike big businesses, freelancers rarely have a large reserve of funds to see them through when clients pay them late. A single late payment for a big job might have dire consequences for a freelancer.
You may depend on a big payment to acquire materials for your next job, or simply to pay the rent. Whatever your expenses may be, freelancers are usually far more vulnerable to a break in cash flow than other businesses.
Payment Methods
Your payment terms must always include your preferred payment method and any relevant details for the completion of the payment. If you want to get paid via direct deposit, your payment terms need to list your banking details in full. If you want to get paid via PayPal, Google Pay, credit card, check, or any other payment method, you need to list all the details clearly.
What are the Most Common Payment Terms for Freelancers?
There are several different payment terms you can use depending on your needs and services. Let’s look at some of the most commonly used ones in more depth.
1. Due Upon Receipt
Due upon receipt terms dictate that your client needs to pay you as soon as they receive your invoice. These terms are often used when your client makes a deposit before you begin work on their project. Once the job is complete, you can invoice them for the rest of your work.
Due upon receipt terms are also sometimes used for smaller projects where the amount payable is relatively low. A client should have no problem paying immediately for a small job, however, it’s standard to give the client a 24-48-hour window after sending the invoice before expecting proof of payment.
2. Net Days
Net days is one of the most commonly used payment terms for freelancers. It allows room for custom payment windows that you can agree on upfront. A net days invoice specifies the number of days after the invoice is issued that payment is due.
The most common payment windows for a net day’s invoice are net 7, net 10, net 15, net 30, net 60, and net 90. The payment window is set entirely at your discretion. In most cases, freelancers use net 30 payment terms. This gives the client 30 days from the date of issue to settle their account. For example, if you issue a net 30 invoice on the 5th of April, you can expect payment by the 5th of May.
3. Net Days with Discount
This can be a useful tactic to get clients to pay you on time if you find yourself with more overdue accounts than you’d like. With these terms, the client gets a final due date as well as an earlier optional due date that grants them a discount.
For example, you can issue an invoice that sets the final due date at 60 days from the date of issue but offers a 5% discount if the client pays within 30 days. Most clients will be eager to take advantage of the discount, thus ensuring that you have a reliable source of income.
4. End of Month (EOM)
An EOM invoice simply dictates that payment is due at the end of the month in which the invoice is issued, regardless of whether it’s early or late in the month.
This is advantageous if you’re working for multiple clients at once, especially considering you can then use a self employed invoice template that you just customize for every job. That way, you have a universally applicable due date, making it easier to keep track of overdue payments. It also means that you’ll receive a lump sum of income at the end of every month.
5. Payment in Advance
Some freelancers demand either partial or full payment ahead of the project’s commencement or completion. Whether your client will agree to this is up to them. But it’s common practice among freelancers to demand at least a partial down payment to cover operational expenses and avoid the debt-trap.
6. Interest Invoice
This is another way to incentivize clients to make punctual payments. An interest invoice dictates a final due date for the price of goods or services rendered, as well as a fixed increase in the price for every set number of days after the final due date.
For example, you can charge 10% interest if the client pays after 30 days, 15% after 60 days, and so on. Most clients will pay on time to avoid incurring additional charges.
7. Proforma Invoice
A proforma invoice simply means that the amount due is agreed upon by both the supplier and the client. A quote or estimate informs the client roughly how much the job will cost, whereas a proforma invoice reflects the exact amount the client has agreed to pay.
Learning basic payment terms is an essential task for every freelancer, no matter what niche you fill. When you know what common payment terms mean, you’ll find it far easier to negotiate payment with clients and create invoices that reflect this agreement. As an added plus, you’ll form a favorable professional impression that will boost your chances of success.
