Invoice payment terms: How to choose the best terms for your business

Invoices contain various details, such as an itemized list of the products and services provided, the total amount due, contact details, and invoice payment terms.

The first three are self-explanatory, but what are payment terms on an invoice? Read on to find out and see how you can get them right for your business.

Here’s what we cover:

• What are invoice payment terms?
• Invoice payment terms examples
• 12 invoice payment terms every business should know
• How to use invoice payment terms
• How to write payment terms in an invoice
• When are invoice payment terms created and updated?
• How to choose the best invoice payment terms
• Manage your invoice payment terms effectively with automated accounting software

What are invoice payment terms?

Invoice payment terms outline how and when customers should pay a business from which they’ve purchased goods or services. They’re a key feature on your business-to-business (B2B) invoices, specifying details like the payment due date, early payment discounts, accepted payment methods, taxes, and penalties for late payments. 

How do invoice payment terms work?

Once you’ve negotiated and agreed the payment terms with the buyer, you create an invoice with the payment term details. The invoice is then sent to your customer, who is legally obliged to stick with the terms of the contract.

Why are invoice payment terms important?

Clearly defining the payment terms and conditions for your invoice settlements is essential for B2B transactions. This is because they’re more complex and need more flexibility than most consumer transactions, which are usually based on immediate, cash-in-advance payment terms.

Specifically, establishing clear payment terms is important because it:

• Helps B2B buyers and sellers manage their cash flow more effectively.
• Minimizes the risk of misunderstandings, confusion, and disputes over payment due dates, methods, and late fees, reducing late payments.
• Increases trust and strengthens business relationships, increasing retention and loyalty.
• Encourages timely and accurate payments.

Invoice payment terms examples

Before we go into detail about the different payment terms you might offer your customers, here are some examples of types of payment information that should be included on your invoices. 

• Payment due date: this specifies the date your customer must pay the total amount. 

• Taxes and additional fees: if your customer is liable to pay any taxes and fees, these should be included clearly on the invoice to avoid misunderstandings.

• Payment terms: this section should detail your exact payment term. For example, whether the payment should be paid in advance, is due on receipt, paid in installments, or paid on a specific date as part of a net payment term.

• Early payment discount: an early payment discount may be offered to customers on net payment terms, such as Net 30 or Net 60.

• Late payment penalties: late payment penalties might be applied if your customer misses the payment deadline. These need to be expressed transparently on the invoice. 

• Accepted payment methods: specify which types of payment methods you accept, which could include bank transfer, credit card, check, and wire transfer. 

Many businesses use smart billing software to generate invoice terms and automate calculations. This can streamline your workflows and help you make sure all the important details are included on your invoices, cutting down on errors, late payments, and other issues. 

12 invoice payment terms every business should know

You’ll see lots of different types of payment terms on invoices, but what do these key terms mean, and how are they used in invoicing?

1. Net 7, 15, 30, 60, and 90: these common payment terms specify the number of days a customer has to make the full payment from the invoice date, including weekends and bank holidays. So, for a Net 15 payment term, the client has 15 calendar days to settle the full balance. They allow for a degree of flexibility, which can benefit business relationships.
2. 2/10 Net 30: this payment term applies an early payment discount of 2% if your customer pays their invoice within 10 days. It’s a common payment term used to incentivize early payments. It can be customized depending on your company’s needs. 
3. Payment in advance: this payment term asks that the full balance is paid upfront, before any goods or services are received. It’s normally used for service-based transactions, such as freelancing, consulting, and contracting.
4. Cash in advance: similar to payment in advance, cash in advance asks for payment upfront before the product is shipped. The term is typically used by product-based companies, such as wholesalers or manufacturers.
5. Cash on delivery: this term stipulates that the payment for your goods or services must be made at the time of delivery. It allows your buyer to quality check their purchase, and can help build trust. 
6. End of month (EOM): in an EOM payment term, the full balance is due at the end of the calendar month that the invoice is dated. For example, if an invoice was dated July 10, the payment must be made on July 31. It’s generally used in long-term contracts when companies send recurring invoices.
7. 50% upfront: this means that the customer has to pay 50% of the total cost upfront and 50% after the product or service has been received. It’s commonly used for long-term projects or high-value contracts.
8. X MFI: MFI stands for “month following invoice”. Here, the due date is on a specific day of the month following the invoice date. So, 15 MFI would mean that if your invoice is issued anytime in July, the payment needs to be made by August 15.
9. Cash next delivery (CND): this is a payment term used for recurring deliveries, where full payment for the current delivery is expected before the next scheduled delivery.
10. Due upon receipt: due upon receipt indicates that the buyer must pay the full balance of the invoice as soon they receive it. 
11. Cash with order: this is the same as cash in advance, where the buyer pays for the goods or services before they’re delivered.
12. Stage payments: also known as installments, stage payments divide the total amount that needs to be paid into smaller sums paid by the customer at agreed intervals. It’s a popular payment term for large-scale, long-term projects. 

How to use invoice payment terms

You’ll need to do a bit of strategic analysis when figuring out which invoice payment terms to use, to make sure they benefit your business.

For example, you’ll want to think about how your payment terms align with your cash flow needs. If you offer flexible payment terms, such as Net 30 or stage payments, make sure you have enough cash reserves to cover your expenses and financial obligations before the payment due date. 

Also, consider how the payment terms you offer will affect your customers. Smaller businesses might not be able to pay upfront, while larger businesses may need more time to process payments in alignment with complex sales cycles. So, using immediate payment terms could strain relationships, increase late payments, and cause you to lose customers.

Whatever option you decide to go with, it’s important that the payment terms and conditions are expressed clearly in your contracts and invoices. Make sure to specify the due date, early payment discounts, late fees, and any additional potential costs. 

How to write payment terms in an invoice

You should make sure your payment terms are outlined clearly and transparently in your invoice to avoid confusion. Include the due date, late fees, and any early discount fees, if applicable. If you use acronyms and abbreviations, these should be spelled out and explained. So, you might write a Net 30 payment term into a contract like this:

Term: 2/10 Net 30. Payment is due 30 days from the invoice date. If you pay within 10 days, you’ll receive a discount of 2%; otherwise, the full amount is owed if you pay within 30 days. If payment is made after 30 days, you’ll be subject to late fees of [amount]. 

When are invoice payment terms created and updated?

Your invoice payment terms should be created at the point where your customer is ready to make a purchase. They should be written into the contract and mutually agreed before they’re finalized and added to the final invoice. 

You might also need to update an invoice with payment terms when circumstances change. For example, if your customer becomes a long-term client, you might offer them increased flexibility and better early payment discounts. Or, if there’s a shift in the economy, industry, or company policies, you might update payment terms to reflect this.

Using accounts receivable and accounts payable software can help you create invoices and keep track of changes. So, whether you want to create a customer invoice, update the payment terms on an existing invoice, or manage invoices sent by suppliers and vendors, you can do it all inside one streamlined platform. 

How to choose the best invoice payment terms

With so many invoice payment terms available, how do you know which ones are right for your business? 

Essentially, it comes down to three factors:

• your cash flow needs
• your industry’s payment standards
• customers’ reliability

If you have a customer base of reliable, trustworthy clients and the cash reserves to cover expenses, then flexible payment terms are an option. Industry standards play a role, too, as flexible payments are common in many industries. 

Common challenges with invoice payment terms

Invoice payment terms aren’t without their challenges, regardless of your chosen type. These are the main issues that you might run into.

• Misunderstandings: if details like due dates and late fees are unclear, it can lead to confusion and disputes that slow down the payment process. 
• Late and missed payments: flexible terms, like end-of-month and net payment terms, come with an increased risk of late payments and non-payments, which could potentially cause you cash flow and revenue problems.
• Lost customers: while flexible payment terms can put your business at more risk, demanding that customers pay you upfront can put them off doing business with you.
• Managing and tracking invoices: when you have many customers and/or different payment terms for different clients, generating invoices on time and keeping track of them all can be a struggle. This can lead to delayed payments and cash flow issues. 

How to negotiate payment terms: 5 best practices

Finding payment terms that meet the needs of both business parties may take some negotiation. Here are 5 best practices to help you achieve a good outcome.

• Aim to understand your customer’s needs: the more you understand your customers’ cash flow, payment capabilities, and financial stability, the easier it will be to tailor your payment terms to suit their preferences, while benefiting your business. 
• Exercise flexibility where possible: offering flexible payment terms goes a long way in retaining customers, ultimately helping you foster positive long-term relationships.
• Be prepared to compromise: to find a mutually beneficial solution, you may need to compromise. For example, if you offer a payment term of 15 days but your customer wants 45 days, you might compromise and set an invoice term of 30 days.
• Incentivize early payments: one of the best ways to negotiate payment terms is to throw in a small early payment discount. Early payment discounts motivate customers to make payments before the due date, improving your cash flow. 
• Add late fees: on the flip side, late fees and penalties can encourage your customers to pay on time, cutting down the risk of late payments. It can also help you cover the cost of unexpected delays while offering the flexibility that your customers want.

Manage your invoice payment terms effectively with automated accounting software

With automated invoicing software, you can quickly generate and send invoices, customize your payment terms, and automate calculations, such as due dates, early payment discounts, and late fees. This will eliminate manual data entry errors, streamline workflows, and help make sure you get paid the right amount by the agreed due date. 

You’ll be able to create, send, and track invoices in real-time from desktop and mobile devices. Get complete visibility on payment statuses, even when you’re on the go. Customize payment terms to suit your business needs and set up automatic reminders to minimize late payments, keeping your cash flow healthy.

Ready to use end-to-end automation and in-built integrations to manage invoice payment terms more effectively? Check out our online invoicing software.