Invoicing and payment terms
Getting your payment terms and conditions for invoice right can be key to a healthy cashflow. You need to ensure your customers understand how much they need to pay and when they must settle up. They are more likely to pay you on time if these terms are clearly set out in writing from the start.
This guide outlines the information you are required by law to include in an invoice and what terms and conditions it should cover. See information that invoices must contain.
It also explains how to pitch payment terms to customers as well as some of the commonly used invoice payment terms.
Information that invoices must contain
When issuing an invoice, you must clearly display the word 'invoice' on the document. In addition to this, you must include the following information:
- a unique identification number
- your company name, address and contact information
- the company name and address of the customer you are invoicing
- a clear description of what you are charging for
- the date the goods or service were provided (supply date)
- the date of the invoice
- the amount(s) being charged
- VAT amount if applicable
- the total amount owed
If you are a limited company or a sole trader you must also provide certain information on any invoices you send.
Limited companies' invoices
Limited companies must have the following additional information on their invoices:
- the full company name as it appears on the certificate of incorporation
- if you decide to put names of your directors on your invoices, you must include the names of all the directors
Sole traders' invoices
A sole trader must have the following additional information on their invoices:
- the trader's name or any business name being used
- an address where any legal documents can be delivered to you if you are using a business name
VAT details to include on invoices
If you are registered for VAT, whether the business is a limited company or a sole trader, you must put the following information on your invoices:
- a unique and sequential identifying invoice number
- the date the invoice is issued
- your customer's name and address
- your business' name, address and VAT registration number
- date of supply to the customer (or tax point)
- a description sufficient to identify the supply of goods or services
- the quantity of goods or services, with a unit price excluding VAT, and the rate of VAT per item
- the total amount payable without VAT added, and the amount of VAT charged
If you are selling to an individual customer or a non-VAT registered company in another European Union (EU) country, you must pay VAT. However, if the customer is a VAT-registered company in another EU country, you don't charge VAT, but you must:
- obtain and show your customer's VAT number (including the two-letter country prefix) and your own VAT number on your VAT sales invoice
- send or transport the goods to your customer within three months, or six months if the goods need processing before being sent
- keep valid commercial evidence that the goods have been removed from the UK within the correct time limit
Your evidence can include a number of different documents - eg the customer's order or your sales invoice. It must clearly identify the:
- transporter of the goods
- goods and their accurate value
- mode and route of transport
- EU destination
If you cannot fulfil these conditions, you will have to pay VAT at the appropriate UK rate.
It is best practice to set up records and invoice correctly for VAT from the time your business starts - you may find it useful to set up a pro forma invoice. A pro forma invoice can be an invoice drawn up by you and sent to the buyer to confirm the details of a contract, or a polite reminder to the buyer that a debt will be due for payment.
Setting terms and conditions
Terms and conditions - sometimes known as terms of trade - are the terms of the contract between you and your customers. They're designed to protect your rights, limit your liabilities and provide you with some security when you sell your goods or provide a service.
Many businesses supply goods and services on the basis of informal, verbal arrangements. However, if agreements are clearly set out in writing then there is less chance of a dispute.
It's important to get your terms and conditions right - if they're inadequate or incorrect, it can be difficult to pursue or prevent bad debt. You could use different terms and conditions for each order, but it can be beneficial to have standard terms for all transactions. If you decide to draft standard terms, it is a good idea to consult a solicitor.
Your terms and conditions should cover information on costs, delivery arrangements, data protection and your right to charge interest on late payments.
You should also incorporate payment terms into your standard contract for all the payment options you offer.
There are other terms and conditions you may want to cover, such as:
- retention of title - allows you to retain ownership of goods already supplied until they are paid for
- time limits for raising a dispute
- circumstances in which the contract might be breached or come to an end
- contra and offset deals against payables - where the buyer pays you in part or full with their products rather than in cash
You may also want to include a clause in your contract regarding credit limits and credit periods. There is currently an automatic default period of 30 days if you do not account for this in your contract - see ensure customers pay you on time.
Make your terms binding
You need to make your customers aware of, and agree to, your terms and conditions. You can do this by printing them on the back of invoices, delivery notes and other documentation.
Explain your terms and conditions to customers at the start of your relationship, before you raise an invoice.
Setting suitable payment terms for your customers
Some businesses offer certain levels of credit to customers - ie supplying goods or services to customers before taking payment. However, if customers do not pay promptly, it can place a considerable strain on your business as the income you need to run your business is delayed.
To safeguard your cashflow, you should check up on your customer - by using information supplied by credit agencies, analysing company accounts or obtaining bank and/or trade references before you give credit.
For more information on carrying out credit checks, see credit checking your customers and setting credit limits.
Payment terms and conditions
You should explain your terms and conditions to customers at the start of your relationship. You can send out a written confirmation of their order with a copy of your terms and conditions of sale. This lets them examine the terms and conditions and discuss any problems they have before you supply goods or services.
You should also print the terms and conditions on the back of your invoices.
You could consider encouraging electronic payment in your terms and conditions, eg via BACS or CHAPS. These systems prevent the risk of bounced, missing or lost cheques. Read about BACS payment for businesses.
The UK Payments Administration also provide information on CHAPS payment.
Also consider sending your invoices electronically - with a copy of your terms and conditions - as it can be much quicker than the post. For more information, see ensure customers pay you on time.
Early payment discounts
You might encourage customers to pay early by offering a discount for early payment. The level of the discount should depend on the profits you are making on orders. This can help to speed up payment, improve cashflow and reduce bad debts.
However, there can be disadvantages to early payment discounts, in particular the financial cost to your business.
Payment terms - commonly used invoice payment terms and their meanings
Your invoice payment terms and conditions can impact the number of days it takes you to get paid. Without them, you aren't communicating when a payment is expected, as well as other conditions like your preferred payment method and any consequences of late payments.
Invoice payment terms
This list explains the payment terms most commonly used on invoices.
|Net monthly account||Payment due on last day of the month following the one in which the invoice is dated|
|PIA||Payment in advance|
|Net 7||Payment seven days after invoice date|
|Net 10||Payment ten days after invoice date|
|Net 30||Payment 30 days after invoice date|
|Net 60||Payment 60 days after invoice date|
|Net 90||Payment 90 days after invoice date|
|EOM||End of month|
|21 MFI||21st of the month following invoice date|
|1% 10 Net 30||1% discount if payment received within ten days otherwise payment 30 days after invoice date|
|COD||Cash on delivery|
|Cash account||Account conducted on a cash basis, no credit|
|Letter of credit||A documentary credit confirmed by a bank, often used for export|
|Bill of exchange||A promise to pay at a later date, usually supported by a bank|
|CND||Cash next delivery|
|CBS||Cash before shipment|
|CIA||Cash in advance|
|CWO||Cash with order|
|1MD||Monthly credit payment of a full month's supply|
|2MD||As above plus an extra calendar month|
|Contra||Payment from the customer offset against the value of supplies purchased from the customer|
|Stage payment||Payment of agreed amounts at stage|
When creating your invoice payment terms, bear in mind that if you have clear, concise and consistent payment terms, it is more likely that your invoice will be paid in time and this will have a positive impact on your business cashflow.
For further information on contract terms and conditions see setting terms and conditions and credit checking your customers and setting credit limits.
Get to grips with cashflow (video)
This short video provides tips on setting up payment plans, monthly payment targets and invoicing customers.