Invoicing and payment terms

Getting your invoicing system and payment terms 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. It also explains how to pitch payment terms to customers as well as some of the commonly used invoice payment terms.

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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.

If you are VAT-registered, there are further details your invoices must include. For more information, see the page in this guide on VAT details to include on invoices.

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
• any business name used in your business
• an address where any legal documents can be delivered to you if you are using a business name

Limited companies may include the names of the directors on their invoices. However, if you are going to publish this information on your invoices, you must include the names of all 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

Interest charged on late payments

You have a statutory right to charge interest under the late payment legislation and may wish to include the following wording:

“We will exercise our statutory right to claim interest (at 8 per cent over the Bank of England base rate) and compensation for debt recovery costs under the Late Payment legislation if we are not paid according to our agreed credit terms.”

You do not have to charge interest, however this may provide an incentive to customers to pay you promptly. For more information, see the page on charging interest on late payments in our guide to ensuring customers pay you on time.

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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 also 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:

• supplier
• transporter of the goods
• customer
• 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.

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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 arising.

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 your 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 – eg full payment, part payment in advance or payment in arrears. You could also offer customers a discount for paying before the invoice due date to encourage early payment. See the page in this guide on setting suitable payment terms for your customers.

There are other terms and conditions your 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. For more information, see our guide on ensuring 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 and allow them to discuss with you any problems they have before you raise an invoice. When you do raise an invoice ensure your terms and conditions are included.

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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 our guide on 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 small businesses on the BACS website – Opens in a new window. You can also read about CHAPS payment on the UK Payments Administration website – Opens in a new window.

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 our guide on ensuring 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.

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Commonly used invoice payment terms and their meanings

This list explains many of the terms commonly used on invoices.

Invoice payment terms

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 stages

For further information on contract terms and conditions see our guide on credit checking your customers and setting credit limits.

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CASE STUDY

Here’s how setting the right payment terms improved my business’ cashflow

Aberdeen-based firm Red Spider Technology designs, manufactures and supplies tools to the oil and gas industry around the world. Set up in 2003, the company employs 43 staff and has offices in the UK, Norway and the Middle East. Co-founder Chris Oliver explains how setting the right payment terms has helped boost the firm’s cashflow.

WHAT I DID

“When we first set up the business, one of our fundamental aims was to deal mainly with solid blue-chip customers who we knew would pay us. Cash management is something we’ve always been highly aware of. We took advantage of invoice discounting to start with, which helped regulate our cashflow, and while it was more expensive than a traditional overdraft – because we paid a small percentage fee to the bank, based on the sales value of each invoice issued – it meant we were paid in five days, rather than 30.

“Now the business has grown, we arrange our own credit control. Our standard payment terms are 30 days, which is the industry standard, although occasionally we have to accept customers’ standard terms which can be up to 42 days. While we don’t do formal credit checking, we’ll often ask new customers to submit a credit application form, so we can at least capture bank details and client contact information. If the level of credit we offer ever became an issue, we’d agree set limits and ensure that no deliveries were made that would take a customer above this limit.

“Equally, if we’re running big development projects, we will usually ask for staged payments as this helps preserve our cashflow, particularly if we have to buy materials up front.”

Avoiding late payment

“Being meticulous with contracts and purchase orders is probably one of the most important ways to avoid late payment. If any of the details are wrong, most clients will just send it back and obviously the clock’s ticking on you getting paid.

“For that reason, we run a strict checking system when we issue invoices, ensuring that the purchase order number is right, that we’re charging VAT when we should be, that we’ve got the right cost code, and that we’re following all procedures correctly.

“Following up invoices by phone or getting one of our sales guys to visit can also help sort out any problems. It may sound obvious, but getting paid on time is really a question of good communication and staying on top of paperwork.”

Understanding customers

“I think it’s also important to understand how clients’ businesses work. Some of our customers hold awareness days for their suppliers and we always make sure we attend these. If the client is putting new systems in place or is facing certain trading issues, it helps if we are aware of these.

“Being friendly and communicative with their accounts departments doesn’t hurt either. We have been known to send a new client’s accounts team a box of doughnuts or some small token so they remember us.”

What I’d do differently

Increase our initial cash reserves

“As our initial funding was quite tight, I would have liked to have had more liquid cash in the business which would have bought us more time to get going. Generally, it takes twice as long to do half the sales you think you will when you first set up.”

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