Last editedApr 20234 min read
Getting paid on time is vital for the success of your business. If you don’t define the right terms under which your customers must pay you, and don’t formally agree these with them, you increase your likelihood of:
Poor cash flow, and
An unhealthy financial position for your company
This guide explores what payment terms are, and how enforcing them helps drive financial efficiency and boost your cash position.
What are invoice payment terms?
Invoice payment terms are the contractually-agreed terms of payment between a business and a customer.
Commonly, invoice payment terms - or just payment terms - refers to when payment is due, relative to the date in which goods or services were delivered, or when an invoice was delivered.
60% of invoices are paid late, according to the Export-Import Bank of the United States (EXIM). That creates a significant cash flow deficit for many businesses, which is not a positive sign for long-term growth, prosperity, or profitability.
To combat late payment, it’s essential to clearly define when you expect your customers to pay you, and make this a contractual element of your invoices. This, in a nutshell, is the function of payment terms.
Your payment terms should be included in any contract your draw up with a customer, and should be clearly visible on every invoice you send out. Your terms should outline:
When you expect to be paid – Whether you expect the customer to pay upon receipt of the invoice, or within a week, or within a month, etc.
The invoice due date – The date by which the payment is due, clearly shown on the invoice so the customer’s accounts payable team know when to action payment.
The currency you wish to be paid in – If you’re trading outside your own territory, it’s important to tell customers whether you want to receive payment in USD, euro, GBP, etc.
The payment method and account details – You need to specify how you accept payment and how your customers are able to pay you via those methods. This may be bank transfer, Direct Debit (A.K.A. ACH Debit or bank debit), credit or debit card, or a digital wallet like PayPal. Some invoicing and accounting softwares allow for one-click payment buttons in the e-invoice itself.
Any other payment conditions – This could include late payment fees you’ll charge for overdue payment, or discounts you offer for early payment.
Setting up your invoicing in the most efficient way is an integral part of improving payment times. Having your payment terms stately clearly and unequivocally on your invoices makes it easier to chase up any late payments.
What are standard payment terms?
Standard payment terms set out the usual payment times for your customers, and may vary depending on where your business is based, what’s seen as ‘normal’ within your given sector or industry, and what credit terms you’re comfortable agreeing with your customers.
Standard payment terms have traditionally been 30 days from the date of the invoice being raised. This doesn't have to be the case - Scandinavian businesses, for example, are more likely to expect shorter 14-day payment terms. Some industries will also differ, with standard payment terms in a sector like construction more likely to be 60 or 90 days from the invoice date.
Even with 30-day terms, many businesses are still not being paid on time. Across the US, invoices are paid on average seven days late, according to EXIM.
What does net days mean in payment terms?
Net days is payment terms terminology representing when payment is due relative to the date goods or services have been delivered.
Common forms are net 10, net 15, net 30, net 60, and net 90 (also written as net 10 days, etc.). Standard payment terms of 30 days, for example, could be designated as net 30 or net 30 days, indicating payment is due on the invoice amount 30 days after delivery of goods or services.
The format of net days designation may also include a discount for when payment is made early, to promote a healthier cash flow for the seller. An example of this format in use is “5% 10, net 30”, where the seller is offering a 5% discount to the buyer if they pay in full (in this case, 95% of the invoice amount) within 10 days of the goods or services being delivered. If they take longer than 10 days to pay, they lose the discount.
Different terms can be offered, depending on how much credit you want to offer your customers, so usual payment terms can include (presuming invoices are issued on the date goods or services are delivered):
|PIA||Payment in advance|
|Net 7||Payment seven days after invoice date|
|Net 10||Payment ten days after invoice date|
|Net 30||Payment thirty days after invoice date|
|Net 60||Payment sixty days after invoice date|
|Net 90||Payment ninety days after invoice date|
|EOM||End of month|
|21 MFI||21st of the month following invoice date|
How to improve your payment terms
Having payment terms in place goes a long way towards formalizing your payment and credit conditions for paying customers, but they can’t improve your payment stats and aged debt single-handedly. You also need to get proactive with other late payment strategies:
Use online invoicing to speed up payment – Most modern cloud accounting platforms also include online invoicing, allowing you to quickly email invoices directly to your customer’s finance team and speeding up the payment process.
Make it easy to pay you – Using the latest modern payment gateways and payment technology gives your customers more ways to settle their bill. A solution like GoCardless will automatically collect the payment via Direct Debit, meaning your customers don’t have to lift a finger.
Offer healthy discounts for early payment – Using net days for your payment terms means you can offer discounts to early payers.
Use tech to predict payment times – Cloud forecasting tools can predict when customers are likely to pay, giving your finance team the ability to prioritize the right customers and debts when it comes to accounts receivable conversations.
Review your customer base and get rid of late payers – This might sound drastic, but if a customer consistently pays you late, they may be more of a threat to you than an asset. Periodically offboarding late-paying customers gives you more time to focus on your most value-adding customers, which will benefit your business in the long term.
How GoCardless can eliminate late payments
With GoCardless, you can add a payment button directly into your finalized sales invoice, allowing your customers to pay you with one click.
Because GoCardless is made for recurring payments, you can also collect future payments from your customers without them needing to lift a finger.
And because GoCardless can integrate with your cloud accounting platform, we’ll also automatically reconcile all received payments with your invoice, cutting down on the financial admin and streamlining the whole process.
Take back control of your cash flow - sign up to GoCardless today.