What is a Split Invoice? A Complete Guide to Flexible Billing

A split invoice spreads the payment for a single invoice across several billing statements, or, in other words, it breaks up the total net amount to be paid into multiple smaller invoices.

Splitting invoices is common when a customer makes a large purchase and agrees to pay in installments. This type of billing method is a flexible and convenient option for both customers and business owners.

That said, if you’re eager to learn more about the meaning of split invoice, how it works, and how you can use it to improve customer experience and manage your sales more efficiently, this article will give all the information you need.

Key Takeaways

• A split invoice is a single invoice divided into multiple invoices or installment payments. It is commonly done when customers need to pay a large sum in exchange for a product or service.
• Some benefits of splitting invoices include enabling flexible payments, enhancing customer convenience, and minimizing the possibility of late payments.
• The different types of split invoice payments include credit cards, debit cards, gift cards, reward cards, Buy Now, Pay Later pay structures, and checks.

What is a Split Invoice & How Does It Work?

A split invoice, also called a split payment invoice or split billing, is a single invoice divided into multiple invoices. Sellers typically use a split invoice payment strategy to manage transactions that involve large payments.

By distributing the payments into a set period of installments, sellers secure better and more consistent cash flow while also minimizing the occurrence of late payments from customers.

A typical example of using split invoice payments is when a customer purchases an appliance, buying groceries, or purchasing items and paying using a credit or debit card.

Freelancers and small business owners also use split billing to protect their business or trade from non-paying clients.

Instead of sending a single sales invoice that charges the full payment for their services, they charge an initial deposit to their clients before proceeding to start working on the project or request.

4 Common Payment Methods for Setting Split Invoices

In reality, split invoices are more common and frequently used than you think, and you’ve at least used various, if not all, methods of payment commonly used to settle them.

Listed below are some payment methods that typically go hand in hand with the use of split invoices:

• Credit cards. Credit cards allow bank account holders to borrow funds from their bank or credit card provider and then repay the amount in installments. The funds that credit card holders can borrow depend on their credit limit, which is based on their credit score.

• Debit cards. Paying for goods and services using a debit card means drawing funds from your bank account or paying electronically through a preloaded or prepaid debit card. Unlike credit cards, debit cards do not come with annual or usage fees.

• Reward cards. Reward cards typically go hand in hand with an establishment or enterprise’s loyalty programs for their customers. Customers earn points each time they use their reward card for every purchase, which they can use later on to get discounts or cover a portion of their payment on their next purchase.

• Store credits or gift cards. Gift cards or stored value cards contain a preloaded sum or amount that customers can use to pay for services or goods in restaurants, retail stores, and other establishments that accept gift card payments.

4 Key Benefits of Using Split Invoices

Using split invoices can be advantageous for both vendors or business owners and their customers. The key to maximizing these benefits is to prepare a split payment model that adheres to the business’s financial goals and meets customers’ demands.

That said, here are some of the key benefits of enabling or using a partial payment model:

#1. Flexibility

One of the biggest advantages of split invoicing is that it offers alternative ways for customers to purchase the goods they want or pay for the services they need.

In some instances, independent contractors also offer a split billing option to potential clients when negotiating their rates for specific projects. In doing so, contractors effectively balance meeting client expectations and securing reasonable payments for their services.

#2. Customer Convenience

Split invoices enable cashless or electronic payments, thereby highlighting convenience for customers who do not have sufficient cash on hand but have essential needs to purchase.

Business owners can accommodate more customers and process more transactions since they enable more than one payment channel for customers to settle their bills.

#3. Improved Cash Flow

By adjusting their existing invoice payment terms to allow installment payments, business owners protect their trade from possible late or non-payments by delinquent customers.

They also improve their customer support and business processes altogether.

Splitting invoices segments a customer’s total bill into a series of smaller and more affordable payments over a fixed period. It gives customers an opportunity to manage their bills while business owners can still secure consistent cash flow into their trade.

#4. Customer Retention

When executed seamlessly, a split invoice payment model is a great way to encourage customer loyalty.

More than discounted prices and exclusive deals, customers also prefer businesses that tap into their pain points and concerns. Not only does a flexible payment option enable customers to get more value for their money, but it also makes their concerns heard and seen.

When and Where Are Split Invoices Commonly Used?

Generally, split invoices are commonly used and beneficial in the healthcare, construction, and education industries.

The reason is that transactions within these industries tend to result in large bills, so split invoicing divides these bills into more manageable payments and consequently boosts affordability and customer satisfaction.

That said, despite the benefits that split invoices can bring to business owners, freelancers, and customers, it does not suit all types of industries and transactions. After all, some business operations may suffer from far greater losses by implementing split payments.

To help you understand better, here’s a closer look at the specific business setup and instances where using a split invoice is more suitable:

#1. Service-Based Industries

Service-based industries that use split invoicing include the healthcare, finance, hospitality, and educational sectors. Most healthcare service providers offer payment plans that enable customers to divide large medical bills into smaller, more manageable invoices.

In the same manner, customers can pay using their debit or credit card when booking hotels or accommodations. Parents pay their child’s tuition fees every semester until such time that the school fees are fully paid.

Meanwhile, when financial institutions loan money to borrowers, the loan repayment is also typically distributed into multiple payment schedules.

It is important to note that whether the services offered in the industries described above may charge customers a large or considerable sum, the implementation of a split invoice payment plan is meant to help secure a win-win transaction for the business and the customers.

#2. Retail and Wholesale

Retailers and wholesalers are also known to use split invoicing because it allows them to cater to different client demands and orders. Let’s say a client places a wholesale order worth $15,000 and requests to have their billing statement split into three invoices.

A wholesaler may also make a counteroffer, wherein they may supply the products or goods in batches and align it with their existing billing cycle for the split invoices.

They do this to balance the costs that come with supplying their clients with the materials they need while ensuring they continue to generate profit as they address the different demands of their clientele.

For retailers, split invoicing is usually done through credit and debit card payments or using reward or gift cards.

#3. Freelancing

Freelancers often struggle with the risk of not getting paid by the time they finish a project or complete their services for a client. As such, by splitting invoices, they can charge clients accordingly at each significant step or progress of the project.

For instance, a seasoned business consultant may send an upfront invoice payment to a new client in exchange for providing an initial assessment of their trade’s sales, operations, and long-term objectives.

Or, a graphic designer sends separate invoices each for creating a mock-up design, implementing revisions, and designing the final draft of their client’s request.

How to Create a Split Invoice in 4 Easy Steps

Creating a split invoice entails having a payment policy in place. Your payment terms will serve as your guide for when you create split billing statements based on your customer’s request or your business needs.

Ideally, you must have also established a solid business plan that will help define your business structure more clearly and forecast your budget, business costs, cash flow, and invoicing process.

Once that’s settled and ready, you can continue with the following steps in splitting invoices:

#1. Use a Template

Creating split invoices is easier if you have an invoice template that you can customize and use repeatedly for future transactions. An efficient way to do this involves using an online invoice generator.

Paystub.org’s invoice generator has a variety of templates to choose from to suit your preferences. It also takes a few minutes to prepare a draft invoice with our generator since all you have to do is fill in the blank fields with the important details of your transaction.

More importantly, our generator comes with a built-in calculator that makes doing all the sales and invoicing math a lot easier for you!

#2. Discuss Your Terms with Your Client

If you’re a freelancer, contractor, or startup business owner, it is ideal to discuss your payment terms with your client first.

Take the time to know their expectations and demands, and determine whether you can meet them halfway and negotiate on a payment schedule that works for both of you. Some business owners create a pro forma invoice based on their initial agreement with their customers.

The pro forma invoice also contains a breakdown of the full payment, which is then divided into multiple invoices. Alternatively, you can use different net terms, such as a net 15, 30, or 90 payment term, to make your split invoicing process more systematic.

Net terms on an invoice provide a specific number of days for when the next invoice statement will be due. For example, if you combine your split invoice with a net 30 term, then your customer should expect their next invoice 30 days after the initial billing statement was issued.

If possible, you can also explain your trade’s late fee invoice policies in case a client misses a payment deadline.

#3. Calculate Additional Percentages on Each Invoice

Using the split invoice example for wholesalers, a wholesaler may add a fixed percentage or additional charges on their original net price, which will then be reflected on the split invoices.

You can apply additional charges on a 50-50, 40-60, or 75-25 basis, depending on the services or goods you sell.

Aside from the percentages, you must also take into account any outstanding payments or fees should a customer fail to settle their bills on time.

If you issued a down payment invoice to your client, the initial amount that they have paid must be subtracted from their succeeding invoices.

#4. Review Your Invoice Details

The final step in creating a split invoice is to go over your invoice details one last time and verify that all the information is correct. Once you’ve confirmed all the details on your split invoice, you can send it to your client and update your accounting books.

Potential Challenges of Splitting an Invoice

Some potential challenges that come with splitting an invoice into two include complicating your billing process and potentially causing invoice disputes from your client when your terms are not discussed properly.

It is crucial to ensure that using a split invoicing system suits your business or operations. At the same time, you must first assess whether your customer would be comfortable with paying multiple invoices for a single or specific service.

You must also be mindful of your existing billing and invoicing system before splitting invoices for any transaction. Otherwise, you may end up charging a single client multiple times for the same purchase or contradict any agreement you have had with a specific customer.

Final Thoughts

Using a split invoice payment system is an effective way for business owners and contractors to regulate their sales without exhausting much of their resources.

Understandably, spreading a single invoice into several billing statements requires a meticulous and foolproof accounting process. It also requires having a keen understanding of what your customers need and expect from your services.

By combining the said principles and knowledge and using all the tips and invoicing knowledge we’ve shared in this article, you can potentially boost your business profit and gain more satisfied customers in no time!