What are payment terms? Everything you need to know to get paid faster

Your business depends on customers making payments for the products and services they receive. Setting clear payment terms and processes helps businesses get paid on time consistently and avoid cash flow issues before they’re a problem.

Sending invoices and collecting payments might seem straightforward, but most businesses will deal with late or missed payments at some point. When missed payments pile up, it can lead to major problems for your business and its future. This guide answers payment questions like:

• What payment terms should you include on your invoices?
• How do payment terms impact your company and your customer experience?
• What can you do to make collecting payments easier?

Learn how to set more effective payment terms for your business and more below.

What are invoice payment terms?

Invoice payment terms are the rules you set for how and when your customers pay for your products and services. Most payment terms set a specific due date for when customers must pay an invoice. They also include clear instructions for how to pay and the consequences of what happens when someone doesn’t pay after a set number of days.

Clear payment terms, agreed before the work starts and repeated on every invoice, make late payments less likely and give you something to point to when a payment is overdue.

Why every business needs payment terms

No matter what type of business you run or whether you sell products or services, you need clear payment terms. Without them, your business is at high risk of losing money on missed or late payments.

Even with clear payment terms, some customers will pay late. Clear terms make it easier to follow up, and to spot a pattern early.

Late payments ultimately cost businesses in the long run. After all, cash flow issues mean you can’t grow as quickly, generate as much revenue, or at worst, keep the lights on.

For these reasons, it’s also helpful to work with an accounts receivable service like Visory. Chasing unpaid invoices is one of the least favorite parts of running a business. When you outsource your accounts receivable, invoicing and follow-up are handled for you, and you decide how firmly overdue accounts are pursued.

Benefits of payment terms

Beyond avoiding late or missed payments, there are many benefits of having clear payment terms. When invoices are paid on time, it helps your business show:

• Better cash flow for growth: On-time payments give you a clear picture of how much money you have to invest back into your business.
• How well you manage your business: Consistent payments are a key performance indicator (KPI) of how well you manage your company finances.
• Creditworthiness: You’ll know what you need from suppliers and how much cash you have on hand, which can help you get loans or other funding.

What should your invoice payment terms include?

Your business is unique, so your invoice probably looks a little different from other companies. However, invoice payment terms have consistent elements no matter the business.

Invoices usually include basic company information like:

• Invoice number to track each invoice
• Your business name and address
• The date you issued the invoice
• Invoice total

For getting paid, these elements matter most:

• Payment due date: Net 30 (payment due 30 days after the invoice date) is a common term, and many businesses use shorter terms such as Net 7, Net 15, or due on receipt.
• Late payment fees or interest: Charge these only if the customer agreed to them in your contract or terms before the work began, and check the limits under your state’s law before you set a rate.
• A list of payment methods you accept: for example ACH bank transfer, wire transfer, credit or debit card, or check

How to set payment terms to get paid

On-time payments directly impact your bottom line. Clear payment terms avoid confusion and make it easier for customers to pay you.

Follow the steps below to set better payment terms to get paid consistently and faster.

1. Send contracts

Setting clear payment terms starts before the invoicing process, and before you even start working with a customer.

It starts with a contract, a legal agreement that you and your customers sign that details:

• How you’ll work together
• Services you’ll provide
• When you’ll start and end work
• How you’ll be paid

A contract sets expectations on both sides before you provide products or services. If someone breaks the contract, there’s a signed agreement that you can refer back to.

When you build your contract, make sure it includes:

• Involved parties: List your company, your customer, and any other involved party.
• Contract term: Outline how long the contract will be active. For example, if you provide six months of service, your contract will have a six-month term.
• Payment details: Describe when your customers will pay you, how they’ll make payments, and any late payment fees or interest. These can only be charged later if they are in the agreement.
• Duties and responsibilities: Outline your duties and responsibilities to your customer.
• All other agreement terms: Every business, product, and service is different. Your contract may require specific terms that are unique to the way you do business. Tailor the contract to your company.

This is general information, not legal advice. If you use the same standard terms with every customer, have a lawyer review them.

2. Invoice promptly

You may be tempted to put off sending an invoice by a couple of days. Maybe it’s not due for a few weeks or you’re just busy. This is a big mistake.

Sending your invoice immediately after doing work will help you get paid for a few reasons, including:

• It’s top of mind: Your company’s name is fresh in your customer’s mind when they receive it. There’s no chance they’ll think it’s spam or an invoice that was sent in error, increasing your chances of being paid on time.
• You can get faster payment: The earlier you send your invoice, the earlier your customers are able to budget, move money around, or otherwise prepare to pay your invoice.
• It shows you’re professional: Sending documents promptly shows your customers that you run a tight ship.

3. Collect deposits or upfront payments

No matter what payment terms or process you set, always prepare for some customers to make late payments. Overall, it shouldn’t happen often or be a big percentage of your business, but preparing ahead will keep your company healthy.

However, there are some tactics you can use to prevent missed payments from happening to start, including:

• Asking for payment in full upfront: Explain to your customers that you require upfront payment for services before they begin. For example, many software companies offer annual pricing to get upfront payment.
• Agreeing on an appropriate deposit: Set the amount and remaining payment milestones in the contract, subject to industry and state law. A 50% deposit is not suitable or lawful for every job. Check the rules that apply to your industry and state before requesting payment.
• Setting up payment milestones: For larger and high-cost projects, break up deliverables over time. For each deliverable, set a payment milestone that they’ll need to pay before you continue work.
• Getting a material deposit: Forecast materials payments before committing to a job. Where permitted, agree on a deposit or lawful progress payments that help fund them. Materials costs do not override any legal limit on deposits; arrange working capital or supplier terms for any remaining gap.

4. Track payments and set automatic reminders

You can’t collect late or missing payments if you don’t know which customers are behind. Luckily, you can track payments and set automatic reminders to lessen the burden of managing your accounts receivable.

Accounting and invoicing software makes it easier to send and track invoices, and you can also receive alerts when customers are past their due dates. Customers can be forgetful. Reminders can help your customers keep up with their end of your agreements.

Decide in advance who chases overdue invoices and when each step happens. A sensible escalation path is a friendly reminder when the invoice falls due, a phone call a week or two later, then a formal demand letter, and only then a collection agency or small claims court. If a customer disputes an invoice, pause the reminders, find out what is wrong, and fix it quickly: a disputed invoice is a different problem from a slow payer.

5. Work with a bookkeeper or accounts receivable expert

How you handle invoices and payments can influence the failure or success of your business. However, many businesses don’t have the time or interest to manage it in-house.

If that’s the case, consider working with Visory, an online bookkeeping service with an accounts receivable team. To get started, book a discovery call and the team will get to know your business and invoicing needs.

Payment terms glossary

While preparing invoices and using accounting software, you may come across these payment terms.

Term	What it is
EOM	End of month. For example, Net 30 EOM means payment is due 30 days after the end of the month in which the invoice is issued.
CBS	Cash before shipment: you receive payment before you ship the order
2/10 Net 30	The customer may take a 2% discount if they pay within 10 days; otherwise the full amount is due in 30 days.
CIA or PIA	You receive payment in advance
Net	Net 7, 10, 15, 30, 60, or 90: Net before a number stands for the number of days you have to pay. For example, you need to pay a Net 15 invoice 15 days after its issue date.