Commonly Used Payment Terms on Invoice

For entrepreneurs managing businesses of any size, mastering the art of generating invoices and securing timely payments is crucial for smooth operations. Prompt collections help maintain healthy cash flow, enabling you to handle costs, pursue expansion, and keep everything running without hiccups.

That said, delays or failures in payments can severely impact your company. Research shows that one-quarter of small enterprises experience holdups of as much as 30 days beyond agreed deadlines, despite established net terms. Such overdue invoices disrupt financial stability, reduce income, and may require shifts in your operational plans to offset the shortages.

Beyond financial strain, these issues can damage ties with vendors and customers, adding extra tension. It's vital to note that repeated delays might indicate deeper problems in your client relationships, possibly necessitating reviews of credit rules or stricter payment terms. Adopting strong invoicing tools and systematic reminders can reduce these dangers and enhance cash management overall.

What are invoice payment terms?

Invoice payment terms are the conditions outlining how and when payments should be made. Business operators establish these terms to promote quick settlements. Popular examples include net 30 and net 60.

With net 30, payment is anticipated within 30 days of the invoice issuance. The 'net' followed by days signifies credit extended where goods or services are provided upfront, with compensation expected by the specified time.

Example of how payment terms work

Picture starting a new retail space and buying $4,000 worth of gear on credit. You've just supplied $6,000 in products to a buyer and sent the invoice.

You're counting on receiving funds by month's end. But the deadline passes without payment, and follow-ups yield no results. Consequently, with outstanding invoices, you're covering overhead like utilities and staff salaries for a venture not yet profitable, and you must settle your own debts. Rather than profiting, you're incurring losses.

This scenario highlights why payment terms matter. Not all clients pay immediately, so craft clear invoices that specify the terms of the transaction.

Design straightforward invoices including options for phased payments and incentives for early settlement. Incorporate penalties for late payments to deter delays. This approach boosts the likelihood of on-time receipts and minimizes outstanding accounts.

The 12 most common invoice payment terms

1. Cash account – Refers to situations where customers pay invoices in cash only, without credit options.
2. Cash before shipment (CBS) – Often used by creators of custom items like artists or designers, requiring an initial deposit prior to sending products to safeguard against unpaid balances.
3. Cash in advance (CIA) – Similar to CBS, but demands complete payment before starting any work. Also called Payment in Advance (PIA).
4. Cash next delivery (CND) – For ongoing customers, meaning full payment of current order before the subsequent shipment. Equivalent to recurring invoices.
5. Cash on delivery (COD) – Payment, in cash or equivalent, is required upon receipt of the invoice.
6. Cash with order (CWO) – Like CBS, but needs payment upfront before processing or producing the order.
7. Contra payment – Occurs when the invoicing party owes money to the recipient, allowing settlement via goods or services instead of cash.
8. End of month (EOM) – Payment must be made by the final day of the month in which the invoice was dated.
9. Interest invoice – A separate bill for fees and interest on past due amounts from earlier invoices.
10. Terms of sale – Details in the invoice covering due date, total sum, item quantities and qualities, invoice ID, delivery timeline, and accepted payment forms.
11. Net 7/10/30/60/90 – Payment expected 7, 10, 30, 60, or 90 days after invoice date. For steady cash flow, opt for shorter periods like net 7, 10, or 30.
12. 2/10 net 30 – Full payment due in 30 days, but a 2% discount applies if settled within 10 days, encouraging faster payments.

Additional Common Invoice Payment Terms

Beyond the core terms above, here are more frequently used payment conditions that can help tailor your invoicing strategy:

• Net monthly account – Settlement required by the end of the month after the invoice month.
• 21 MFI – Due on the 21st of the following month after invoicing.
• 1% 10 Net 30 – 1% off if paid in 10 days; otherwise, full amount in 30 days.
• Letter of credit – Bank-guaranteed payment, common in international deals.
• Bill of exchange – Written commitment to pay later, often bank-backed.
• 1MD – Monthly credit for one full month's supply.
• 2MD – As above, extended by an additional month.
• Stage payment – Agreed installments at project milestones.

Control payment methods with payment terms

Besides setting timelines, dictate the methods of payment in your terms. Specifying preferences helps ensure swift processing and prevents misunderstandings or postponements.

To facilitate quick payments, make the procedure effortless for clients. If accustomed to checks or cash, incorporate modern options they prefer. Two excellent methods include:

a) Smart invoices

Software for invoicing enables easy payments through integrated features, supporting debit/credit cards and ACH transfers.

These systems support automatic recurring payments, simplifying billing. Alternatively, send invoices via email with direct payment links.

Such tools are ideal for long-term agreements; select ones offering complimentary ACH services.

b) Credit card payments

A favored option for convenience. Request card details for charging. Account for associated fees in your planning.

Decide whether to absorb fees or charge them to clients, and clarify this in agreements to avoid surprises.

Why you need net terms management

You can't always dictate client payment schedules. Disruptions on their side can affect your operations. Consider a net terms management service to mitigate this.

For example, Resolve assumes the risk of delays, ensuring your cash flow remains steady. They allow qualified clients 30, 60, or 90 days to pay, while advancing you up to 90% of the invoice value the next day, after vetting creditworthiness.

If managing invoicing and collections is challenging, Resolve provides software solutions for those without dedicated teams.

Using Resolve means no more pursuing overdue payments; they handle collections, acting as your credit department.

Final word – why you need payment terms on invoice

Handling invoices and payments can overwhelm small business owners, diverting focus. Thus, define clear payment terms on each invoice, like COD or net terms, so expectations are set.

Some delays are inevitable, so partner with firms like Resolve for processing. They advance up to 90% immediately, extend net terms to buyers, and manage follow-ups. Schedule a demo for details.

Note: This article is for general information and not legal, business, or tax advice. Consult professionals for specific guidance. No liability is assumed for reliance on this content.