What are payment terms?
Published
Payment terms are the agreement setting when and how a supply is paid for: the credit period, instalments, and any early-payment discount. The due date derives from them, and they are among the most important working-capital levers - because they decide how many days you finance your customer.
The common structures
| Term | Meaning | Where it fits |
|---|---|---|
| Full advance | Collection before supply | New customer, custom order, high risk |
| % deposit + balance on delivery | Shared risk | Made-to-order work |
| Cash on delivery | Payment at handover | Retail and fast distribution |
| Net 15 / 30 / 60 | A period after the invoice | Established business customers |
| Milestone payments | Tied to deliverables | Projects and extended services |
| Early-payment discount (e.g. 2/10 net 30) | A discount for paying early | When cash is worth more than margin - the arithmetic is on the accounts payable page |
How to set the term
A term is a credit decision, not a courtesy: a new customer starts on advance or a short period with a low limit, and earns longer terms and a higher limit through payment history, not promises. And always set your terms against your own cash cycle: granting customers net 60 while paying suppliers in 25 days means financing 35 days from your own pocket on every deal - see the cash conversion cycle.
Where they must be written
In the contract or accepted quotation first, then on the invoice itself, explicitly. A term appearing for the first time on a post-delivery invoice is arguable; a term agreed but absent from the invoice loses its daily claiming reference.
Frequently asked questions
A large customer imposes net 90 - do I accept?
Price the financing cost into the deal (90 days of working capital) and trade it for volume or a purchase commitment. Silently accepting a long term is an interest-free loan nobody costed.
Should I add late-payment penalties to invoices?
A delay-compensation clause is a contractual matter to be drafted with proper advice, consistent with the applicable rules. In practice, credit limits and supply holds for late payers act faster than penalties.
Different terms for different customers - isn't that unfair?
It is legitimate, ordinary risk management - the way card limits differ. The consistency that matters is within each contractual relationship, not across all customers.