Arrears billing is one of two ways businesses typically bill customers. In deciding how you should you bill your customers, familiarizing yourself with billing in arrears vs. billing in advance (as well as other types of billing) is a helpful step before setting up your billing process. In this article, we will go over what it means to be paid in arrears and other options you have.
What Does Arrears Billing Mean?
In billing, the most common options are: billing in advance and billing in arrears. Billing in arrears simply means that you bill your customers after the job is complete. Instead of taking payment beforehand to cover expenses or other costs, you must wait until after the work is completed to get paid. You may have also heard it referred to as “invoice in arrears,” “paid in arrears,” or “arrears billing.” (Do note that “arrears” is another term used in accounting to refer to payments that are late or overdue.)
Consider this arrears billing example: you are an electrician who is doing a small, one-time job for a homeowner. You finish the work and your client pays at the end of your visit. This is arrears billing. If you’re a freelance writer, you may get paid after sending an invoice in arrears, meaning that you bill your client after finishing the project, not before or in the middle of it.
As a small business owner, arrears billing can be simpler to manage but it can also be challenging to maintain proper cash flow. You do have other billing options, though.
Arrears billing vs. billing in advance
The difference between arrears billing vs. billing in advance is simple. With arrears billing you pay after work is done. If you bill in advance, you send an invoice for the full and total amount before work commences.
Unfortunately, this makes it easier for the small business but it can test the trust of your customers. If they’re unsure if you’ll do the job to their expectations, they may be unwilling to pay in advance. Billing in advance is likely best done with repeat customers or in fields where this is the industry standard.
Other billing options
In addition to getting paid in arrears or in advance, there are a few other options. These include:
- Retainers: Many industries that perform ongoing work on a regular basis require payments made in advance or on an automatic, upfront schedule. Examples may include monthly IT services, legal help, or accounting fees.
- Scheduled payments: Handling long-term projects? A scheduled payment calendar divides the project into multiple, measurable benchmarks. For example, a website developer may bill their client a percentage of the full fee after initial mock-ups are approved, another portion of it half-way through development, and then the rest of the amount once the site is finished.
- Initial deposits: You charge the customer for an initial deposit that’s a percentage of the total. For example, construction companies may charge for the cost of supplies up front before beginning work on a larger remodel or build.
What Are the Pros and Cons of Billing in Arrears?
Billing in arrears is a great option for many businesses. It’s used by the smallest businesses as well as the largest utility companies.
For example, as a consumer, you most likely pay your water and cable bills in arrears. You consume water or data respectively and then the companies bill you after you have used their product or service.
Further, this is often the most efficient billing method for many companies because if they had customers pre-pay up front they may overcharge their customers and then have to issue a refund, or they may undercharge and have to issue multiple bills. For these types of companies, billing in arrears is the most efficient for them and their customers.
With all business decisions there are pros and cons you must consider. Most importantly, this is what you should think about to determine if billing in arrears is right for your business.
Pros of arrears billing
The pros of billing in arrears include:
- Delivers flexibility to your business and your customers
- Limits the amount of refunds your company will need to process
- Allows your business to get paid in full for all products or services you provided for the customer
Cons of arrears billing
The cons of billing in arrears include:
- Delays payments, which means less cash in your business
- Requires time to set up consistent and automatic processes to remind customers to pay
- Risks that your company is not paid by your customer after work is done
How to Reduce the Risks of Billing in Arrears
If you’re concerned with the drawbacks of billing in arrears, but can’t bill in advance, you can mitigate your risks. Here’s how:
- First, check the credit of your customers to make sure they are trustworthy and have a high probability of paying their bills
- Second, to help manage cash flow in your business, you can require a deposit or down payment (as noted above)
- Finally, you can use tools (like PaySimple) to easily track your invoices and resend them with the click of a button or easily set up a recurring payment schedule
For many businesses, arrears billing is an industry standard. If you must invoice in arrears to remain competitive, these steps can help you get a bit more peace of mind.
How to Bill in Arrears with PaySimple
If you use PaySimple and want to bill in arrears, the steps are easy.
All you need to do is go to your Settings page. Under “Billing Preferences,” enable the “Billing in Arrears” option. You can also click here to get a step-by-step tutorial with images. Once you’ve enabled the ability to invoice in arrears you’ll need to manage your billing schedules that bill in arrears. This tutorial walks you through the simple steps to billing in arrears.