Invoice Payment Terms You Need to Know
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Nothing can develop into a prickly situation more quickly for a freelancer than being unsure when the final payment due for work is going to arrive. In fact, 5% of all freelancers list issues getting paid as their number one problem.
Like many aspects of being self-employed, doing everything you can to ensure proper payment is made accurately and on time often comes down to being armed with the right information.
For more about invoicing, take a look at our guide to invoicing as a freelancer.
Establishing invoice payment terms with your client
You should never go into any job without establishing clear parameters with the client about:
- how much you will be paid
- how often you will be paid
- when the payment is due
- what method of delivery that payment will come (i.e. direct deposit, check, PayPal or other online payments etc.)
It’s imperative that you secure certain guarantees about payment before you lift a finger on the job. No matter how well you know the client or how easygoing and natural the fit between you appears to be, you are bound to get burned sooner or later when it comes to getting paid accurately and on time, and there are few feelings worse in the freelancing realm.
Here’s some more information about creating a binding freelance contract to help protect yourself.
Determining when your payment should be due is perhaps the most vital piece of information on the invoice. The terms of payment should have been agreed upon already, but now is the time to reinforce the way you like to do business.
The two most common forms of payment request are “Due Upon Receipt” and “Net D”. Let’s unpack both of those terms to determine which is right for you and your business.
Related: Free Downloadable Invoice Templates
The ‘Due Upon Receipt’ method
What does ‘Due Upon Receipt’ mean?
Pretty self-explanatory, right? When you add “Due Upon Receipt” to an invoice for a client, it means when you turn the work in and submit the invoice, the client is expected to make payment arrangements immediately. In the world of digital payments, this can sometimes mean quite literally within minutes of getting the invoice; but generally, it refers to a payment being paid by the end of the next business day.
When would you use ‘Due Upon Receipt’ as your invoice payment terms?
As a freelancer, you might label an invoice ‘Due Upon Receipt’ because it’s a one-time job with a one-time client – for example, proofing a website’s content, writing a whitepaper, or designing a logo.
For larger projects, you could send multiple “Due Upon Receipt” invoices that reflect milestones in the job lifecycle; for instance, a downpayment when the project is started if it is above a certain dollar amount, a second when the job is 50% done, and a final payment when the work is complete.
The benefits of using ‘Due Upon Receipt’
The biggest and most obvious benefit for freelancers to use ‘Due Upon Receipt’ payment terms is that you get money into your bank account almost immediately for work performed.
A second advantage in using the Due Upon Receipt invoice method is that you are far less likely to forget about money you are owed, leaving a hole in your accounting books (as well as your pocketbook). When the invoices aren’t paid for 30, 60, or 90 days, it can be difficult to remember what money is owed and when.
Hint: Using a free app like AND CO is a great way to stay on top of unpaid invoices. Your real-life Chief Operator can assist with creating invoices and reminding you and clients when they are unpaid.
Disadvantages of using ‘Due Upon Receipt’
Of course, for every positive, there’s usually a negative, and the Due Upon Receipt method is no exception. A big roadblock with this method involves the timing of when your invoice is sent. Say you finish your project early and send the work along with your expectations of final payment, only to discover the client isn’t currently capable of paying your bill.
Keep in mind that clients are sometimes awaiting paydays of their own, and have structured project due dates to reflect this. In fact, you may find that your client is not willing to agree to ‘due upon receipt’ payment terms in the first place, precisely due to these cash flow issues.
The most common issue with this method comes from clients who won’t pay without first going over the work meticulously and potentially going through a series of corrections.
While it’s important to respect clients’ rights to have the work done as close to their specifications as possible, it’s a good idea to build in language to your agreement on how many rounds of corrections can be made on their end before final payment. Otherwise, you might find your invoice for final payment collecting dust on the shelf while your client is asking you to add just one more line of code… and another line of code… and another line of code, over the span of weeks.
More information: How to Customize Your Invoice to Reinforce Your Brand
The ‘Net D’ method
What is the ‘Net D’ payment method?
No, it’s not the name of the world’s first accountant/rapper. Net D is simply a financial term meaning the invoice is due in a certain number of days, represented by the variable “D”.
It’s common practice among brick-and-mortar businesses to bill clients and each other by this method, usually with a 30-day period before the money is due.
For freelancers and their clients, this period can be adjusted up or down depending on the job and the agreement. It can be used for the final payment or simply an agreed-upon amount as part of a job’s milestones.
The benefits of using ‘Net D’
While waiting to get paid is not many freelancers’ strong suit, there are certain advantages to it.
The main one is a general certainty of pay dates, because most clients who use Net D are large enough to have their own accounting departments. Instead of having to hope that a single client will remember they owe you money, you are often relying on one or more professionals whose only job in the company is to pay the bills. In general, this makes the process a lot smoother if there is a problem with your payment.
Disadvantages of using ‘Net D’
Of course, the biggest disadvantage of using Net D is that you need to wait longer to get paid for your work.
Another concern is that your payment may slip through the cracks. Because they are usually dealing with several companies and invoices, there’s a chance that your payment could get missed in error – and you may have to wait through a company’s entire billing cycle before the problem is solved.
Read more: 7 Things to Do Before You Send Your Next Invoice
Which payment terms should you request?
The type of payment request on your invoices will largely depend on the type of client you work for and the arrangement you’ve made with them. While Due Upon Receipt invoices carry the instant gratification of getting your money to you within a short period of time, it’s not always something that clients can agree to.
Net D invoices usually mean a longer wait to be paid for your work, but can also offer more stability in payment dates.
In the end it comes down to the agreement you make with your client. Just ensure you have it in writing so you have recourse if anything goes wrong with your payment!
Send, track, and follow up invoices with this free invoicing software. It even let’s you know when a client has viewed your invoice!