A healthy business relies on a stable revenue stream. With supplies to order, rent to cover, and employees to pay, you need predictable payment from your customers whenever you deliver goods or services. As a business owner, you’re ultimately the one responsible for timely payment and thus a steady cash flow. You do this by providing clear contract payment terms when you invoice your customers.
Direct-to-consumer (D2C) ecommerce and retail businesses usually have the luxury of receiving payments immediately upon making a sale. But invoice-based workflows with payment terms is common for business-to-business (B2B) or service-based businesses. Here’s a guide to setting up payment terms, with common invoice payment terms you can apply to your business operations.
What are payment terms?
Payment terms are a set of rules agreed upon by a seller and a buyer outlining when payment is due, along with accepted payment methods.
Payment terms may include:
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An invoice date
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A due date
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Payment options (e.g., cash payments, credit cards, and money transfer apps)
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Any early payment discounts
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Penalties for late payments if applicable
Setting clear, strict payment terms benefits buyer and seller alike. The buyer has a transparent understanding of due dates and late payment fees. The seller improves their chances of receiving payment on time, helping them keep up with their company’s cash flow requirements.
Elements of payment terms
When you make a sale or deliver goods or services, you’ll issue an invoice with specific payment terms. Here are key elements to include in your terms:
Invoice amount
The invoice amount is the total sum the buyer is obligated to pay for the products or services provided. It typically includes the base price, applicable taxes, fees (e.g. shipping fees, rush fees), and any additional costs agreed upon in the contract. A seller might also break a lump sum payment into installments, which would be outlined as part of the payment terms.
Payment schedule
The payment schedule outlines when payments are due. Some common payment schedule terms include:
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Payment in advance. Payment in advance is also called cash in advance (CIA). Common in ecommerce, this means the customer pays before goods are shipped. In a service industry, this means clients pay before the service is rendered.
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Due on receipt. This means full payment is due as soon as merchandise is delivered or a service is rendered and is sometimes called cash on delivery (COD). It’s common in industries like food delivery, automotive repair, trucking, and manufacturing.
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Net 30.Net 30 means you, the seller, must receive payment within 30 days of issuing the invoice. Other variations include net 15, net 60, and net 90 (vendor must receive payment in 15, 60, or 90 days).
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End of month. This means that payment is due by the last day of the month in which an invoice was sent.
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Staggered payments. Some payment terms allow partial payment over a prescribed period of time. For example, a contract may call for an immediate payment of 25%, with additional 25% sums owed at net 15, net 30, and net 45.
Manner of payment
Your agreed-upon payment terms will also contain accepted payment methods. Some businesses specify a preferred payment method and offer discounts for certain payment terms or types. It’s common for sellers to offer multiple payment options. These include:
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Cash, for COD or CIA
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Credit and debit cards
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Payment apps, such as Venmo and Zelle
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Bank transfers, such as ACH transfers or wire transfers
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Personal checks, bank checks, and money orders
Early payment discounts
Any discounts applied to the payment terms should be itemized on the invoice. To incentivize early payments—and optimize cash flow—a seller may offer early payment discount terms. These are conditional discounts providing a small price cut if the buyer pays within a shorter, specified period. Examples of these incentives include:
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2/10 net 30. This arrangement offers a 2% discount if the customer pays within 10 days. Otherwise, full payment is due within 30 days.
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1/15 net 45. This provides for a 1% discount if the bill is paid within 15 days. The full customer payments are due within 45 days.
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2/10 EOM (end of month). This term allows a 2% discount if the buyer pays within 10 days after the end of the month in which the invoice was issued. For example, if a seller sends out an invoice on January 4, the buyer can get a 2% discount if they pay on or before February 10.
Late payment penalties
Late payment penalties are charges applied when a payment is not made within the agreed timeframe. Missed payments can disrupt business operations, so sellers impose penalties to maintain a predictable cash flow. These penalties are often calculated as a percentage of the overdue amount. They can also come with a flat fee on top of the amount due.
How to set up payment terms
- Assess your cash flow needs
- Research industry standards and legal requirements
- Evaluate customer payment history
- Clearly define your payment schedule
- Detail late payment penalties
- Consider early payment discounts
- Support multiple payment methods
- Automate invoicing and accounts receivable processes
- Periodically review and revise your payment terms
- Balance your cash flow needs with your customer relationships
Setting and optimizing payment terms is a crucial part of keeping your cash flow steady. Here’s how to create a complete payment and invoicing policy.
1. Assess your cash flow needs
Start by determining your company’s financial requirements. This means reviewing your monthly operating expenses, payroll cycles, and when you need cash on hand. You can also calculate your company’s acid test ratio to assess how quickly you can pay off your short-term debts. You may discover periods of slower cash flow where receiving on-time payments is especially important.
This initial analysis will help you determine a realistic payment schedule that supports your business operations without causing a cash shortfall. For instance, if your company’s own bills are due by the 15th of the month, you could set 2/10 EOM payment terms with your customers. This greatly improves your odds of having the needed funds in your account by the 10th day of a month—in time to cover your expenses.
2. Research industry standards and legal requirements
Look at what your competitors and other businesses in your industry are doing. Understanding common practices, such as whether net 30 or net 60 is the norm. Aligning your terms with these standards can make you more attractive to customers who are used to a particular payment cycle.
For example, your current invoicing standards may require upfront payment for all goods and services. Upon surveying the competition, you may find that your competitors use a 2/10 net 30 payment model. Shifting to these terms may help you compete for new B2B clients and thus maximize cash flow and improve profitability over the long haul.
3. Evaluate customer payment history
Consider the reliability of your customers. For new customers or those with a history of late payments, you might start with stricter terms. For long-term, trustworthy customers, you may offer more lenient terms like net 45 to strengthen your relationship and reward their loyalty.
4. Clearly define your payment schedule
Choose a specific payment schedule (e.g., COD, net 30, 1/15 net 45), and state it clearly on every invoice. This removes ambiguity and sets a firm expectation. Be consistent with your chosen terms to build predictability and professionalism in your business practices.
5. Detail late payment penalties
Include a clause outlining the consequences of late payment. This should specify a penalty fee or interest rate that will be applied to overdue invoices. While you may not always enforce it, its presence encourages prompt payment and legally protects you if a debt becomes seriously past due.
Make sure your payment terms comply with all applicable laws and industry regulations. For instance, while it’s common to charge a percentage-based late fee, stronger measures—like asset seizure—may not be legally permissible.
6. Consider early payment discounts
To keep your cash flow steady, incentivize your customers to pay sooner. Offering a small discount for early payment, such as 2/10 net 30, can be a win for buyer and seller alike. Such a policy improves the odds that you, the seller, will receive cash when you need it, and it rewards the buyer for invoices paid on time. Beyond this, a skillfully applied discount can incentivize more purchases and strengthen customer loyalty.
Structure your pricing so you can afford such a discount. If you’re working with narrow profit margins, a 2% discount may not make sense. Consider raising your prices so you’re still making an acceptable profit after offering the early payment discount.
7. Support multiple payment methods
Make it as easy as possible for customers to pay you. Offer a variety of payment options, including bank transfers, credit cards, buy now, pay later (BNPL), and various forms of online payments. The more convenient you make the payment process, the faster you are likely to get paid.
Offering flexible payment options can also improve your odds of getting the money you’re owed. For instance, you can let customers pay their bills in installments, charging little or zero interest. You can offer discounts for cash transactions, where customers save money on the retail price but you also save on transaction fees.
8. Automate invoicing and accounts receivable processes
Leverage accounting software to centralize all payment data and automatically generate invoices. Such software can set up automated reminders for approaching deadlines and overdue payments. It can also track outstanding invoices and schedule alerts when an account is past due. Automating these processes reduces administrative work and ensures you’re consistently following up, which is a key factor in getting paid promptly.
9. Periodically review and revise your payment terms
Your business is not static; your payment terms shouldn’t be either. As your company grows and your business model evolves, your cash flow needs may change, and market dynamics may shift. Periodically review and update your payment terms to ensure they remain relevant, fair, and aligned with your current business goals.
If you scale up, what might have once been massive orders (e.g., $100,000 for a truckload of merchandise) may become more routine sales transactions. You might be able to adjust your payment terms—such as going from cash in advance (CIA) to cash on delivery (COD)—to reflect your new business dynamics.
10. Balance your cash flow needs with your customer relationships
While it’s important to maximize cash flow and pay your own bills, you must concurrently nurture your customer relationships. Be flexible and open to communication. If a loyal customer is facing a temporary hardship, work with them to set up flexible payment terms rather than imposing a late penalty.
Building a reputation as a fair and reasonable partner is invaluable for long-term success. The most resilient businesses find ways to get paid on time and simultaneously treat their customers with care and respect.
What are payment terms FAQ
What are normal payment terms?
Normal payment terms vary by industry. In business-to-consumer (B2C) ecommerce, it’s common to require cash in advance (CIA), which means the customer pays before goods are shipped. In a B2B transaction, it’s more common for payment to be due a certain number of days after invoicing (e.g., net 15, net 30).
What are the five payment terms?
The five main elements of payment terms are the invoice amount, payment schedule, manner of payment, discount terms, and late payment penalties.
What does the payment term CIA mean?
CIA stands for “cash in advance,” which means a customer must pay in advance before goods are transferred or services are rendered. Sometimes CIA means the payment must literally be in cash, but in other cases, the term covers all forms of payment (e.g., credit cards, debit cards, and checks).
What does it mean when a customer wants payment terms?
If a customer wants payment terms, it means they want to know when payment is due, what payment methods are accepted, any discount options, and any late penalties.
What is a payment term example?
An example of a payment term is net 30, which means that full payment is due within 30 days of invoicing.
