What are Payment Terms? A Useful Guide for Businesses

If you're not enforcing your payment terms, you're basically giving out interest-free loans, and it's costing you. 

Whether you're selling custom software, coffee beans, or construction services, setting clear payment terms is non-negotiable. They're the invisible guardrails that keep your revenue flowing, your books balanced, and your client relationships clear.

Businesses, or sellers, usually set the payment terms, which they specify on the invoice sent to the buyer. Companies with strong bargaining power or those following established industry standards may have greater control over their preferred terms. Occasionally, buyers can negotiate the terms for high-value orders.

New technologies like payment gateway software, mobile payments, and digital wallets make it easier for you and your customers to settle bills, though traditional methods such as checks, wire transfers, and debit or credit cards are still widely used.

To ensure a smooth transaction, you must understand the various types of payment agreements and the challenges you and your customers might face in processing payments. This will also help you decide on the type of payment processing software you need for your business. 

Why are payment terms so important for your business?

Imagine you're the owner of a small business, and you've just secured a significant order from a new customer. Excited about the opportunity, you promptly start fulfilling the order.

But despite delivering your end of the deal, there's no sign of payment from your customer as days turn into weeks. Meanwhile, you find yourself dipping into your own funds to cover expenses, from operational costs to payroll.

56% of small businesses in the US are waiting for payments from unpaid invoices. This represents a significant operational risk, exceeding just a minor cash flow problem.

The lack of agreed-upon payment terms leaves you in a precarious position; this is exactly why you need to have payment terms on your bill. They are like the traffic signals of your business finances and keep things moving smoothly by:

• Set clear expectations between you and the client. When terms are agreed upon upfront and detailed on the invoice, there’s far less room for misunderstanding. This protects both parties and keeps your accounts receivable process smooth.
• Help you forecast and manage cash flow. Knowing when payments will arrive lets you budget for things like payroll, vendor payments, and inventory purchases.
• Reduce late payments and chase-downs. Clients are more likely to pay on time when expectations are clear, particularly if an early-payment incentive or a late-payment fee is involved. This way, you spend less time sending reminders or following up.
• Reinforce professionalism and build trust. Clear, well-structured invoices signal to your clients that you run a tight ship. It shows you value both your work and your relationship with them, which makes clients more likely to respect your boundaries and treat your timelines seriously.
• Support long-term client relationships. Nobody likes surprises when it comes to money. Transparent terms create smoother business relationships. It is even more crucial when you’re working with repeat clients or large contracts.

What are the different types of payment terms?

There are different payment terms you’ll see once you start doing business. But  some are far more common than others, which you should be familiar with:

• Immediate payment requires the buyer to make payment instantly upon receipt of the goods or services or upon invoice issuance. This term is often used interchangeably with “cash on delivery” or “payable on receipt.”  While the term “cash” may be confusing (since it’s not the only accepted payment method), payors can also use checks, credit or debit cards, and wire transfers.
• Net 7, Net 10, Net 15, Net 60, Net 90, Net xx, etc., indicate the number of days customers must pay an invoice in full since the invoice date. The word “net” means the total amount paid after discounts. There are many variations of this type of payment term.
• Net 30, end of the month (EOM), means the payment is due by the end of the month following the invoice date.  This can be useful if your billing cycle doesn't align perfectly with calendar months.

Sometimes, companies agree to make exceptions to their standard payment terms and divide or combine payments. Below are some of the most common types of such payment terms:

• Prepayments or advance billing occur when both parties agree that the payor will pay a percentage of the value of goods or services before they are delivered.  This reduces the risk of losing money. 
• Discounts for early payments encourage customers to pay before the due date. For instance, “net 30 5/10” means a customer has 30 days to pay in full but will receive a 5 percent discount if the invoice is paid in 10 days. The discount won’t be applied if the payment is made later than that date.
• Recurring payments occur on a regular basis, such as monthly or quarterly, like your monthly Netflix subscription. This payment type is usually processed automatically, and the amount is the same every time. Recurring payments are canceled when the business relationship between the payor and the payee ends.
• Partial payments refer to the option to pay an invoice in multiple installments. The difference between partial and recurring payments is that partial payments are only processed during a predefined period. For instance, a piece of equipment that costs $100,000 can be paid in five quarterly installments of $20,000. Partial payments are usually combined with prepayments.  In the case above, the customer may pay 20 percent ($20,000) in advance and the remainder in four monthly installments of $20,000.
• Consolidated payments help companies pay multiple invoices at the same time. Since banks usually charge companies to process payments like wire transfers, it makes sense for businesses to try to avoid making too many payments.
• Progress Payments are common for lengthy or expensive projects in industries like construction. The total payment is divided into installments tied to specific milestones. For instance, you might receive 50% upfront, 25% upon completion of a key phase, and the remaining 25% upon project finalization.

When shipping internationally, payment terms become even more crucial due to factors like distance, currency fluctuations, and potential trust concerns. Here's a breakdown of some key payment terms to consider:

• Letter of credit (LOC) is most commonly used in international trade. It is a guarantee issued by a bank on behalf of the buyer. It assures the seller they will receive payment, even if the buyer defaults. This reduces the risk for the seller in international transactions where trust might not be fully established.
• Documentary collection involves the exchange of shipping documents for payment via the banks of buyers and sellers. The seller's bank collects the payment in exchange for shipping documents from the buyer's bank. This document exchange can happen as a "document against payment" (D/P) or "document against acceptance" (D/A).
• Open account is when the seller ships the goods or provides the services and invoices the buyer, who is then expected to pay later, typically within agreed-upon terms (e.g., Net 30). It carries high risk for the seller and is only suitable for established, trustworthy customers with a proven track record of on-time payments.
• Consignment allows the seller to retain ownership of the goods until they are sold by the purchaser, who then pays the seller a predetermined percentage of the sale price.

What are the most common payment methods in business?

It's important to mention payment methods in your invoice as part of the terms of payment. This clarifies options for clients, promotes faster payments, and projects a professional image. Here are the most common payment methods available for different businesses.

All these types of payments are processed through national and international electronic payment networks such as the ACH Network in the United States or the pan-European automated clearing house (PE-ACH). These networks are based on the concept of a clearing house — a financial institution that facilitates the exchange of payments, securities, and derivatives. 

What payment terms should be included on every invoice?

Essential payment terms for any invoice include: 

• Invoice date: The official date the invoice is issued. This starts the payment timeline (e.g., for Net 30 terms) and is crucial for tracking aging invoices.
• Invoice number: A unique identifier for each invoice. Helps both you and your client reference, organize, and search for past billing.
• Total invoice amount due: The full amount your client owes, including line items, taxes, discounts, and fees. Keeps the payment process clear and avoids disputes.
• Payment due date: The exact date when payment is expected (e.g., “Due by December 15, 2025”). This avoids confusion about the payment window.
• Accepted payment methods: Lists all the ways clients can pay you: ACH, wire transfer, card, PayPal, etc. Makes it easy to take action and reduces friction at payment time.
• Payment plan details: The installment amount and frequency of payment for large projects or clients facing cash flow challenges. 
• Late payment policy: Defines any penalties for overdue payments, such as a flat fee or interest rate (e.g., “2% per month after due date”). Helps enforce timeliness.
• Dispute contact information: A direct name, phone number, or email for the person handling billing questions. Reduces back-and-forth and speeds up issue resolution.
  
  

Source: FreshBooks

What are the biggest challenges with payment terms?

When managing payments, companies face many challenges and threats that can have a significant financial impact on both payors and payees. Businesses need to be careful to avoid fraud and errors at all stages of the payment process, from invoicing to making payments to collecting payments. Making use of free invoice management tools can help avoid these challenges. 

1. Fraud identification and protection

Electronic and digital payments are convenient but may expose companies and their customers to fraud. While banks use advanced technology to prevent fraud, companies don't always have big budgets and tend to rely on the technology provided by e-commerce platforms. Alternatively, some companies use a merchant accounts for high-risk payments. These specialist providers vet risky transactions and cap the companies' exposure to friendly-fraud disputes.

Unfortunately, fraudsters can be very creative and find all kinds of ways to trick merchants and their customers. Here are some of the most common.

• Friendly fraud refers to attempts by buyers to get a refund on goods they bought online, by pretending they never received the items or that they returned them. Some people may also claim their credit cards have been compromised and they didn’t make the purchase.
• Stolen data is the result of individuals bypassing security systems through hacking or data breaches to access sensitive personal information. This information is used by hackers or sold on the dark web.
• Fake online stores are created to get credit card and other sensitive information from consumers. Some fake online stores can be easily identified when they offer promotions that seem too good to be true, or when they provide no details about the company that manages the store.

2. Currency fluctuations with international payments

Globalization and the internet have enabled businesses to sell products (and sometimes services) all over the world. This isn’t an issue when a global company sells in local currency and its customers pay in the same medium of exchange. Things get more complicated when a supplier provides goods in one currency, such as USD, but its buyers hail from all over the world. In this case, buyers will need to buy USD to pay the supplier. Depending on the exchange rate and its fluctuations, the payment may not be equal to the value of the goods or services purchased.

For instance, a Canadian company that buys products or services worth $1,000 in the U.S.needs to buy USD to pay the invoice. If the exchange rate between U.S. and Canadian dollars changes between the invoice date and the payment date, the company may pay more or less than what it would have paid on the invoice date. In the example below, a buyer that needs to pay a $1,000 USD invoice will pay CAD $60 more if the exchange rate moves against them, or CAD $20 less if the rate shifts in their favor.

Invoice amount: $1,000 USD

Exchange rate and amount due as of invoice date: 1.41 ($1,410 CAD)

Exchange rate and amount due as of payment date:

• 1.47 → $1,470 CAD
• 1.39 → $1,390 CAD

3. Multiple entities involved in billing: “Pay to” vs. “ship to” vs. “bill to”

Large enterprises and groups of companies often have very complicated processes for managing payments. The business entity that purchases goods or services might not be the one that makes the payments. Furthermore, separate entities can be invoiced by different suppliers, and the parent company can consolidate all invoices to process payments.

It is therefore vital for the company to clearly define which business entity is responsible for what type of purchasing, invoicing, receiving, and payment.

4. Late or non-paying clients

Since not all customers pay on time despite clear payment terms, companies need to do their best to collect past-due invoices. One way to collect debt is dunning, by which companies send letters to remind customers they owe money. Businesses may also send interest invoices to penalize bad debtors by applying a percentage to the amount of the invoice.

When everything else fails, companies can use debt collection agencies to collect the money on their behalf. Another option is factoring, when companies sell their accounts receivable to third parties that become responsible for collecting the payments. The difference between debt collection and factoring is that the former is a service delivered for a fee, while the latter is a transfer of debt collection responsibility between two companies. Factoring can, therefore, be more expensive for a business if it sells its accounts receivable at a discount.

Frequently asked questions about payment terms

Got more questions? We have the answers.

Q1. What’s the difference between Net 30 and Net 30 EOM?

Net 30 starts counting from the invoice date. Net 30 EOM starts counting from the end of the invoice month. For example, if you issue an invoice on November 10, Net 30 is due December 10, but Net 30 EOM is due December 31.

Q2. Can I change payment terms after sending an invoice?

Yes, but only with the client’s agreement. If terms need to be updated, issue a revised invoice or a formal amendment. Never assume it's okay to make changes unilaterally.

Q3. What are standard payment terms for freelancers?

Most freelancers go with Due on Receipt or Net 15 for first-time clients. For ongoing relationships, Net 30 is typical. Large projects often require partial upfront payment to reduce risk.

Q4. What are typical payment terms for enterprise clients?

Large organizations often push for Net 60 or Net 90 to align with internal payment cycles. Small vendors should plan accordingly or negotiate shorter terms in exchange for incentives like discounts.

Q5. Can I enforce payment terms in court?

Yes, provided they were documented, ideally in a contract, invoice, or email. Courts typically enforce clear written agreements.

Q6. What happens if a client refuses to pay?

First, send friendly reminders. Then escalate with a dunning letter. If that fails, consider a collection agency, legal action, or factoring to recover funds.

Q7. Can payment terms vary by client?

Definitely, just manage them consistently. For example, offer Net 15 for new clients and Net 60 for enterprise accounts. Use CRM or billing tools to track terms per client and avoid confusion.

Q8. Are verbal agreements about payment terms legally valid?

They can be, but they're hard to prove. Always follow up verbal conversations with written confirmation, even if it’s just an email. Courts favor written documentation every time.

Get paid on time, every time

If you’re not in control of your payment terms, you’re not in control of your cash flow.

It’s that simple.

The businesses that scale, stay solvent, and get paid on time don’t leave payment processes to chance. They define terms clearly, enforce them consistently, and back them with systems that do the heavy lifting.

Stop reacting to late payments. Build a process that prevents them.

Understanding terms is key. So is choosing the right platform. Discover top payment processing tools for 2025 to support your cash flow.

This article was published in 2019 and has been updated with new information.