Last editedNov 20223 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, include general terms:
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) – PIA refers to any payment made ahead of schedule, such as 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 own terminology that you must get to grips with. The types of payment terms used in international trade always start with strong Terms of Sale.
These are the basic payment terms agreed upon between the business and the buyer. In the case of international trade, they 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:
Buyer covers shipping costs
EXW (Ex Works) – The seller delivers the goods as soon as they are made available to the buyer at the seller's premises or other designated premises.
FCA (Free Carrier) – The seller is responsible for export clearance and delivery of goods to the carrier at the named place of delivery.
FAS (Free Alongside Ship) – The seller clears goods for export and places them alongside the vessel at the named port of departure.
FOB (Free On Board) – The supplier pays all the costs in the country of origin and the buyer takes responsibility once the goods are on board the ship.
Seller covers shipping costs, buyer assumes risk
CFR (Cost and Freight) – The seller assumes responsibility for the delivery of goods to a destination port of the buyer's choosing. The seller will pay to export the goods from the country of origin and for the freight.
CIF (Cost, Insurance and Freight) – The seller is responsible for delivering the goods to a ship, loading the goods onto the ship and insuring the shipment until it reaches the port of destination.
CPT (Carriage Paid To) – The seller delivers the goods to a destination previously agreed on by the seller and the buyer. It can also be the handoff to the prefered carrier of the buyer.
CIP (Carriage and Insurance Paid) – The seller delivers the goods to a destination previously agreed on by the seller and the buyer.
Seller cover shipping costs and assumes risk
DAT (Delivery at Terminal) – The seller clears goods for export and is fully responsible for the goods until they have arrived at a named terminal at the end destination. The goods must be unloaded at the terminal.
DAP (Delivered at Place) – A type of arrangement between buyer and seller in which the seller agrees to pay all the costs of moving sold goods to a specific location.
DDP (Delivery Duty Paid) – The seller takes all responsibility for fees and risks of shipping goods until they are delivered to a place agreed on by the buyer and 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.
Be aware that if you do accept international payments, there will undoubtedly be processing fees to navigate depending on which payment gateway you use. Indeed, PayPal can charge as much as between 6% and 9%. Thankfully, GoCardless has streamlined pricing that makes collecting international payments more affordable – 75% cheaper than PayPal for a $5k international transfer.
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.