Payment terms: our complete guide

It goes without saying, all businesses need clear and concise payment terms, it’s an easier journey if they are continuously paid on time. Therefore, it is so essential that you clearly define the terms under which your customers must pay you.

Without first clarifying your expectations, you are setting yourself up to receive late payments and a poor level of cash flow. If you want your company to be financially healthy, you need to enforce strong payment terms.

This guide will clear up any confusion you have regarding payment terms, as well as informing you on how to enforce them, ultimately allowing you to boost the financial efficiency of your business venture.

What are invoice payment terms?

Payment terms are the conditions set by the seller in their terms and conditions as the payment part of a sale, this typically specified by the seller to the buyer when payment should be made for goods or services.

Contractually agreed terms of payment between a business and its customer are often referred to as invoice payment terms. These can also simply be called payment terms and will come into action once products or services have been delivered, or once the invoice for those products or services has been delivered.

Did you know that 39% of invoices delivered by UK-based companies were paid late in 2019? This can be extremely harmful to businesses of any size, but particularly smaller ventures that have to keep an ever-watchful eye on their cash flow.

In order to ensure these problems do not occur within your company, you need to make it clear that you expect your customers to pay by a certain date, and then make that date contractual within your invoices. This, to put it bluntly, is the function of payment terms.

What payment terms can include

The payment terms you have set out should be included in any and all contracts with your customers and client base. They should be visible on every invoice you deliver and outline each of your payment-related demands. Keep in mind that some terms could alter slightly depending on what type of business venture you run.

Your terms should outline the following:

• When you expect to be paid

You may want your customers to be upon receipt of an invoice, or within a certain block of time. Make it clear and easily understandable here.

• The invoice due date

List the date that payment will be due, so your customer cannot be under any false illusions as to when they will need to make payment. This will also allow the customer’s accounts payable team to know when to action payment.

• The currency you should be paid in

This may be something you are yet to consider, but it is an important part of the payment term process. You may want to be paid in GBP, euros, USD, etc. Make it clear on your contracts and invoices.

• The required payment method and account details

You should inform your customers on how you accept payments and how they are able to pay you. List the payment methods they can choose from to ensure they avoid all possible confusion within this area. The possible methods could include bank transfers, direct debit, card payment, or others. Certain software will allow people to utilise one-click payment within the e-invoice itself.

• All other payment conditions

If you can think of certain requirements that have not been listed here, it may be because they are unique to your business. You should likely also list those here and clear all areas of your company’s payment terms.

Always opt to set up your invoicing in the most efficient way possible, as this will improve your payment terms and make things simpler for both yourself and your customers. This also aids you when chasing late payments.

What are standard payment terms? 

Standard payment terms set out the typical payment times for your clients and may differ contingent upon where your business is based, what’s viewed as ‘ordinary’ inside your given area or industry, and what credit terms you’re open to concurring with your clients.

When conducting business, it is important to be aware of the different payment terms that are available in order to find the best option for your company.

The most common payment terms in the UK are net 10, net 30, and net 60. Net 10 means that the invoice must be paid within 10 days, while net 30 means that the invoice must be paid within 30 days. Net 60 means that the invoice must be paid within 60 days.

Each of these options has its own benefits and drawbacks, so it is important to weigh all of the factors before making a decision. There may also be industry-specific payment terms that are worth considering.

For example, in the construction industry, it is common to offer a discount for early payment. Ultimately, the payment terms that you choose should be based on what is best for your company and your specific situation.

For UK organisations, standard payment terms are 30 days from the date of the receipt being raised, though Scandinavian businesses are bound to expect more limited 14-day payment terms. A few businesses will likewise vary, with standard payment terms in a sector like construction bound to be 60 or 90 days from the invoice date.

How do I improve my payment terms?

Simply by having a set of payment terms in place, you will be working towards forcing your customers and clients to pay you on time. Though, this will not take care of all the work needed in this area of business finance. You will also need to implement further late payment strategies.

Here are a few examples of what you can begin to do:

• Online invoicing can speed up payment

If you can quickly email invoices out to customer’s finance teams, you will prompt them to pay on time, or even occasionally early if you are lucky. Think of this as a more convenient solution for all involved.

• Make things easy for everybody

Speaking of convenience, if you can make it as easy as possible to pay you, you are more likely to receive your cash on time. Utilise the most modern payment technology and give your customers a variety of ways to settle their bills. We have solutions available for use that will get your payment to you without you even having to think about it; we will touch more on this later.

• Early payment results in discounts

You should think about offering your customers an incentive for paying early. Yes, you may see it as losing out on a little bit of cash with every sale that is made, but you’ll get your money sooner than ever before and your cash flow will thank you for it. Here you should consider using net days for payment terms so you can offer discounts as you see fit.

• Review your customer’s payment history and get rid of late payers

If people are paying you late on a consistent basis, they are likely doing more bad than good to your business. To ensure you avoid this in the future, it may be a wise idea to review your current crop of customers and say goodbye to the ones that are constantly holding you back and negatively affecting your cash flow. Focus your time and effort and the people that are helping you build towards a brighter and better future.

What does ‘net days’ mean in payment terms?

When someone speaks about net days in regard to payment terms, they will be mentioning when payment is due relative to the date goods or services have been delivered. The most common forms are net 10, net 15, net 30, net 60, and net 90.

We could help to quickly improve your cash flow

By utilising invoice finance, you can free up the cash that is currently tied in unpaid invoices and use it however you wish. This flexible funding option is great for small business ventures that need to get hold of cash which isn’t available to them due to late customer payments.

Invoice Finance is the perfect solution for business ventures that have been turned down by banks after applying, or that have a history of bad credit/financial troubles. If you need to improve cash flow, this is likely going to be a great method for you to utilise.