Payment on invoice is one of the most popular payment methods in German retail—both in brick-and-mortar stores and ecommerce. In 2023, around 27% of online purchases in Germany were paid on invoice. As a result, companies with German customers should consider invoice payments as a payment option.

In this article, you will learn what payment on invoice is, how it works, its pros and cons, and how businesses can offer it to their customers.

What’s in this article?

• What is payment on invoice?
  
• How does payment on invoice work?
  
• What are the advantages of payment on invoice?
  
• What are the disadvantages of payment on invoice?
  
• How can retailers offer payment on invoice?
  

What is payment on invoice?

Payment on invoice is a type of deferred payment method in which the customer does not have to pay until they have received the product. Customers order products without paying at the time of purchase. Instead, an invoice is included in the delivery or sent digitally. This invoice specifies a specific payment deadline (e.g., 30 days after receipt of the goods). Within that period, customers are required to transfer the invoice amount to the company’s designated account.

How does payment on invoice work?

Payment on invoice can take place in just a few simple steps. Here is a summary of the process:

Product order

Customers select the desired products in the online shop as normal, browsing the website and adding items to their cart. At checkout, they select the option, “Payment on invoice.”

Payment on invoice is also possible in many brick-and-mortar stores. Customers must inquire about it on site because not all retailers offer this option. In addition, payment on invoice is sometimes only available for certain customer groups, such as regular or business customers.

Credit check

To avoid payment defaults, many retailers run credit checks on customers who opt to pay on invoice. This involves reviewing criteria such as past payment history and the customer’s financial situation. If a customer’s credit check is positive, payment on invoice is approved.

Some businesses or their payment providers also limit the maximum value of an order based on the customer’s creditworthiness. In these cases, customers might only be able to purchase up to €300 or €500, for example.

Shipping and invoicing

After a successful credit check, the goods are prepared for shipment and sent to the customer. The shipment includes an invoice with all the important information: the invoice amount, the due date, and the company’s bank details. Alternatively, the invoice can be sent digitally by email.

When paying on invoice in a brick-and-mortar store, customers can either take the goods directly or receive them later. In particular, this depends on whether or not the goods are in stock. In many cases, the business issues the invoice directly at checkout. However, the business can also send the invoice later by email or post or enclose it with the delivery of the goods. Some retailers require a signature to confirm the purchase contract, and some require a deposit.

Receipt and inspection of goods

Customers receive the ordered goods and have the opportunity to inspect them before submitting a payment. This allows them to check the products for completeness, quality, and any potential defects.

Invoice payment

Within the specified payment period—typically 14–30 days—the customer must transfer the invoice amount to the company’s designated account. It is important to specify the payment purpose correctly so the payment can be clearly associated with the order. For example, if “invoice number 12345678” is stated as the reason for payment on the invoice, the invoice number should be entered exactly as it is on the bank transfer.

Alternatively, customers can return the goods to the company before the payment deadline. In this case, no payment is due.

Dunning process for late payments

If customers do not pay their bills on time, the dunning process begins. First, the company sends a payment reminder, followed by a dunning letter. If the customer still does not pay, the company can hand the claim over to a debt collection agency.

What are the advantages of payment on invoice?

Payment on invoice has several advantages for both customers and businesses. Below is an overview of the most important ones:

Advantages for customers

• Payment flexibility: Customers are given a payment deadline and can pay the outstanding invoice amount within that period. Instead of having to pay at the time of ordering, they can choose a more flexible time to pay.
  
• No additional costs: Unlike installment buying, there are usually no additional costs or interest charges with purchase on account, provided the customer meets the payment deadline.
  
• Easy payment process: Paying by invoice is straightforward and usually does not require the immediate entry of sensitive bank or credit card details.
  
• Security and trust: Customers can see the goods before they pay. This builds trust, especially when buying from new or unfamiliar retailers.
  
• No risk of defects: If the goods are damaged or faulty, they can be returned without payment. There is no financial risk to the customer.
  

Advantages for retailers

• Customer satisfaction: Customers can feel more secure paying by invoice. This builds trust in the retailer and can improve customer loyalty.
  
• Reduced risk of abandonment: Customers are less likely to abandon a purchase when paying on account. This is because they do not have to enter sensitive payment information during the payment process.
  
• Increased revenue: Paying by invoice lowers the barrier to purchase because customers do not have to pay until they receive the goods. This can increase conversion rates and revenue.
  
• Competitive advantage: Companies that offer payment on account can differentiate themselves from competitors who only accept prepayment or immediate payment.
  

What are the disadvantages of payment on invoice?

While there are many advantages to buying on account, there are also some disadvantages. Below is a summary of the most important points for customers and retailers:

Disadvantages for customers

• Late fees: If the invoice is not paid on time, customers can be charged late fees and interest.
  
• Credit check: Some companies run a credit check. If the information provided is negative, the payment method can be rejected. Customers with poor credit might not be able to pay on account.
  
• Payments overview: When customers make multiple purchases on account, it can be difficult to keep track of all outstanding invoices and their due dates. As a result, payments can be accidentally overlooked or paid late.
  
• No immediate discount: Some retailers might offer discounts for immediate payment that are not available when you purchase on account.
  

Advantages for retailers

• Payment defaults and delays: Retailers run the risk of customers not paying their bills or paying them late. This can lead to liquidity problems for retailers, especially when large amounts are at stake.
  
• Increased administrative costs: The effort required to manage outstanding invoices, dunning letters, and payment reminders can be time-consuming. Retailers often need to dedicate additional resources to accounts receivable management. In addition, credit checks can be costly.
  
• Higher probability of return: Customers who buy on account might be more likely to return items. Because they have not made a financial commitment, they might feel less obligated to keep products they’ve ordered.
  

Learn more in our detailed comparison of the advantages and disadvantages of payment on invoice.

How can retailers offer payment on invoice?

If you run a business and want to start accepting bill payments, there are a few preparations you’ll want to make in advance:

Legal protection

First and foremost, you’ll need to understand the legal requirements that apply to you. When in doubt, seek legal advice. In Germany, for example, you must comply with the German Civil Code (BGB) and data protection laws when collecting personal data for credit checks. It is also important to establish clear payment terms early on. This should include the due date and the consequences of late payment.

Technical implementation

Next comes technical implementation. External service providers can help by providing the necessary technical infrastructure. With Stripe Payments, you can automatically offer your customers in Germany more than 100 different payment methods, including purchase orders. This allows you to accept and manage all payments with ease. The additional payment option should be integrated into your website in a user-friendly way so the purchase process runs smoothly.

Management of outstanding receivables

It’s quite likely some of the invoices you issue are going to be paid late, so you should work on monitoring all outstanding debts in a timely manner. This includes keeping track of incoming payments, issuing dunning letters, and, if necessary, referring the debt to a collection agency. Many companies rely on automation tools to send reminders and dunning letters. This reduces the administrative burden and ensures no payments are missed.

For effective risk management, you should also consider the use of factoring or accounts receivable insurance. With factoring, you can sell your outstanding receivables to a factoring company and receive a large portion of the invoice amount immediately. The factoring company will retain a small portion of the invoice amount as a fee. The factoring company then assumes the risk of processing payments.

When you use Stripe Payments, you benefit from particularly fast payouts: Stripe will send you the invoice amount in as little as two days, regardless of when or if your customers pay. Your invoicing and dunning processes are also completely outsourced to Stripe.

Customer outreach

Lastly, it’s important to inform your customers about your new payment option. The best way to do this is on your website or in a newsletter or personalized email. Make sure you’re transparent about payment terms, due dates, and the consequences of late payment.