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As a business supplying products or services, cash flow is vital. Ensuring your customers pay you on time should be a top business priority. A fundamental way to ensure this is to use a contract setting out your invoice payment terms. However, you must be careful to ensure your invoice terms are clear. There are several risks of using clear invoicing terms, including the risk of non-payment. This article will explore the risks of unclear invoicing terms and why you should avoid them.
Why Are Invoice Terms Important?
Investing time in planning how your business will charge customers and clearly communicating your payment terms to them is important.
A common way to do this is to present customers with a written contract setting out your business payment terms.
Every business will have different payment terms – for example, to reflect the products or services and how they are delivered.
For instance, each business may require different types of payment terms, including:
- the need for customers to pay a deposit upfront;
- fixed fees payable before the products or services commence;
- payments on particular intervals or key milestones being achieved; or
- interest for late payments to help your business recoup some costs of chasing late invoices.
As explored above, each business must ensure its invoicing terms reflect the practicalities of how it invoices. Invoicing terms are not standard or a one-size-fits-all approach. You must ensure that the invoice terms in your contract correctly reflect how your business wishes to invoice in practice. If you require support with drafting appropriate terms, you can engage a commercial contracts lawyer. A commercial contracts lawyer will examine your business processes, understand your company’s payment procedures and draft correct and bespoke invoicing terms accordingly.
What Are the Risks of Unclear Invoicing Terms?
Unclear invoicing terms can lead to various problems and issues. Vague invoicing terms could include ambiguous provisions or terms that do not plainly spell out the dates on which a customer’s payment is due.
Let us explore some of the risks of unclear payment terms.
Unclear Invoicing Terms Lead to Mismatched Expectations
If your invoicing terms are unclear, customers are likely to query them. A savvy business customer will want to be fully clear on what you charge and when they need to pay you.
At the negotiation stage, unclear payment terms may concern new potential customers. For example, vague payment terms can lead to back-and-forth negotiations and increased costs and time. Worse, a new potential customer may decide not to work with you if they feel uncertain about when they will need to pay you and how much.
For existing customers, unclear payment terms could lead to mismatched expectations. This could lead to customer confusion and complaints about your payment terms. These problems could be risky for your business and its customer relationships and damage goodwill.
Unclear Invoicing Terms Can Lead to Cash Flow Problems
Unclear invoicing terms could result in customers failing to pay you on time. Your payment terms need to be very clear about matters including:
- the trigger point for payment, or when exactly the customer needs to pay you; and
- any additional charges such as fees for expenses you incur or if the customer requests extra work outside your agreed scope.
If your invoicing terms are unclear on these matters, customers may fail to understand what they need to pay you and when. This could lead to cash flow problems. For example, if customers pay late or do not pay the full amounts they owe you, you may be out of pocket.
Cash flow problems can be severe for any business, and so this is a significant risk to avoid.
Unclear Invoicing Terms Can Lead to Disputes and Increased Costs
In the worst case, unclear invoicing terms can lead to customer disputes.
For example:
- a customer may dispute your invoices as the terms are unclear; or
- a customer could refuse to pay you what they owe you because the contract did not clarify that certain services and expenses would be chargeable.
If the dispute escalates, it can result in a court claim. Court claims are incredibly time-consuming and stressful. Further, they can be costly and exceed the amount the customer owes you. As such, a court claim over non-payment should be the last resort and avoided as far as possible.
By including clear invoicing terms in your contract at the outset, you are far more likely to avoid non-payment disputes.
In summary, the risks mentioned above highlight why your business needs to use clear invoicing terms that are simple for customers to understand and comply with.
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Key Takeaways
Your invoicing terms must be clear as a business supplying products or services. Unclear invoicing terms can lead to a range of problems – from mismatched expectations to cash flow issues and even disputes. You should ensure that your invoicing terms are clear and robust and that they are bespoke to reflect how your business invoices in practice. If you are unsure about how to draft clear invoicing terms, you can work with an experienced commercial lawyer to support you with this.
If you need help drafting invoicing terms to encourage prompt payment, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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