Invoice payment is a common payment method in the B2C and B2B sectors. Here we show you what it means, what typical payment terms look like and how to record invoice payments in the accounts.
Invoice payment: Meaning
An invoice payment is a payment method with which a customer pays a merchant or service provider for the provision of a delivery or service. The merchant or service provider defines the invoice payment terms, which specify by when an invoice must be paid and whether it is permitted to deduct a discount for earlier payment.
What is the difference between an invoice and a bill?
Sometimes the terms "invoice" and "bill" are used synonymously, but this is not correct. An invoice is issued by the service provider and sent to the service recipient, who must then pay the amount.
A bill is a request for payment where payment is usually expected immediately, for example when going to a restaurant.
Invoice payment terms in the UK
Companies are very free in the design of invoice payment terms. There are no legal requirements as to what these terms should look like. However, the valid payment terms must always be referred to on an invoice.
This can be done by referring to the general terms and conditions, where the payment terms are stored, or by writing the applicable terms directly on the invoice.
What are typical invoice payment terms?
Typical invoice payment terms contain the following information:
- Due date
- Reference to the payment method (by bank transfer, cheque, etc.)
- If offered: What discount rate applies if paid earlier
- If offered: What conditions apply to installment payments
Invoice payment due date
An invoice always has a due date by which the invoice amount must be received by the seller. The customer must adhere to this and must ensure that he keeps to this date, otherwise he will be in default of payment, which can have a negative impact on his credit rating.
However, sellers must ensure that the customer can meet the due date, which is why the deadline should not be too tight (7 days minimum). The usual is 14 days in the B2C sector and 30 days or longer in the B2B sector.
The statutory payment period is 30 days. If no due date is stated on the invoice, this period automatically applies. However, a reference to this should be made on the invoice if the statutory payment period is to apply.
Invoice payment: Example for 14 days payment
If you want to issue an invoice which the customer pays within 14 days, you can choose the following wording:
Payment terms: net 14
Instead of this short form, the terms can also be written out:
Payment terms: Payment is due withing 14 days of invoice date
Or: Payment terms: Payment due 12 May, 2022
Invoice payment terms for discount rates
If you want to offer your customers a discount if they pay the bill earlier, you can formulate it in shorthand like this, for example:
Payment terms: 2/7 net 14
This means that you may deduct 2% from the invoice amount if you pay within 7 days. Otherwise, the full invoice amount must be paid within 14 days.
The short form can also be written out:
Payment terms: 2% discount for payments made within 7 days; 14-day due date
How do you record invoice payments?
In a company's accounting, there must be a process for dealing with incoming and outgoing invoices so that one does not lose track of one's receivables and payables. It also ensures that expenses and income are correctly accounted for and that the journals are correct at the end of the business year.
If a customer has paid an outgoing invoice, this must be recorded so that the invoice is not mistakenly left as "overdue". If an incoming invoice is paid, this must also be recorded so that the invoice amount is not transferred a second time by mistake.
In order not to lose track of incoming and outgoing invoices as well as payments, it makes sense to use invoice management software. These tools automatically keep track of the due dates and match the account data with the invoice data, so that when a payment is received, the invoice is automatically marked as "paid". The software also makes bank transfers so that you can pay your incoming invoices automatically as well.
Invoice payment reminder email when payment is overdue
Sometimes it happens that an invoice is overdue because a customer has not paid within the deadline. In this case, you should send an invoice payment reminder by email as soon as possible. Most of the time, customers pay immediately because they simply forgot to pay. In order not to burden the customer relationship negatively, a friendly tone of voice should therefore be chosen in the first reminder, for example:
Hi [Client's name], We haven't received payment for invoice xyz, due on xx/yy/zzzz, with an overdue payment of £100.00. We kindly ask you to check your accounts, and if the invoice payment has not been made yet, to do so until xx/yy/zzzz. In case you haven't received the invoice, please find it attached. Kind regards, [Your name]