Last editedFeb 20222 min read
Whether you’re a freelancer working on your first invoice or a company dealing with international export, understanding the various types of payment terms keeps your documentation clear. Sending accurate purchase orders and invoices helps ensure timely payments, maintaining cash flow for businesses great and small.
Why are types of payment terms important?
Understanding the types of payment terms is vital for any business owner or contractor. Selecting the right terms ensures you can pay the bills and maintain a healthy cash flow. It also helps your customers plan for their own accounts payable, keeping the lines of communication open. While you can submit an invoice to a customer without any terms and conditions, this leaves the matter of payment open-ended. It’s better to be crystal clear about how – and when – you expect to be paid.
Different types of payment terms in invoicing
The first set of payment terms to consider are those used in standard invoicing. When you create an invoice, you should include general terms including:
The invoice date
The amount owed
The payment date and time
Accepted payment methods
Payment plan details
Deposit or advance payment requirements
Invoices should also be clearly marked with a chronological number to keep your accounting system well-organised. Recurring invoices are a good idea if your business provides ongoing services or is working on a long-term project. This ensures a steadier flow of income so that you can maintain adequate inventory and pay your own bills.
Different types of payment terms in purchasing
Now that we’ve covered the basics of invoicing, here are some additional common types of payment terms in purchasing. These are important to understand whether you’re sending the bill or making the purchase.
Payment in Advance (PIA) – A PIA refers to any payment made ahead of schedule, such a down payment for completion of a freelance project or to cover the cost of expenses.
Cash on Delivery (COD) – Also known as Payable on Receipt or Immediate Payment, this simply means that payment is due when the project is delivered to the client.
Line of Credit (LOC) – This lets the customer make a purchase on credit, settling bills in instalments over time.
Net 7, 10, 30, 60, 90 – Net payment terms show that the payment is due the specified number of days after the invoice date of issue.
Different types of payment terms in international trade
The world of global shipping comes with its terminology, but the types of payment terms in international trade starts with a strong Terms of Sale. These are the basic payment terms agreed upon between the business and buyer. In the case of international trade, it should clearly state who pays international duties and taxes, when shipping will take place, and other relevant factors.
Additional types of payment terms in international trade include International Commercial Terms or ‘Incoterms’ like the following:
EXW, FCA, FAS, FOB – These terms state that the buyer covers shipping costs.
CFR, CIF, CPT, CIP – These state that the seller pays the shipping cost, with risk assumed by the buyer.
DAT, DAP, DDP – These state that both shipping costs and travel risk are assumed by the seller.
Incoterms are regulated by the International Chamber of Commerce and help determine who is responsible for specific shipping-related costs like damaged goods and delays.
The bottom line
It’s worth going over the various types of payment terms to ensure you’re using the most relevant option to minimise late or missed payments. Using the most sensible payment terms helps businesses to get paid on time. Businesses can also make it easier to get paid on time by using services like GoCardless. GoCardless offers Direct Debit, a pull-based payment option that puts you in control of payment terms and timings. This method allows invoices, subscriptions, and other recurring payments to be collected on time, every time.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.