Payment terms - What are payment terms?
Payment terms are the conditions surrounding the payment part of sale, typically specified by the seller to the buyer
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Payment terms provide clear details about the expected payment on a sale. Often, payment terms are included on an invoice and specify how much time the buyer has to make payment on the purchase.
These terms allow for additional information such as the type of payment expected, whether any discount will be provided, how the buyer can make the payment, as well as any special terms discussed during the sales process.
How payment terms are determined
Businesses can set their own payment terms. For example, some businesses might choose not to provide a due date and instead request cash on delivery (COD) or even up-front payment.
In the UK, standard, default payment terms are 30 days from the date of issue of the invoice. However, businesses may choose to set different payment terms or even arrange special payment terms with a particular customer.
What payment terms can include
Beyond when the payment is expected from the customer, payment terms can include other elements of a sale such as discounts for early payment.
There are many reasons to offer a discount, but some businesses choose to use a discount on payment before the due date as an incentive for the customer to make the payment quickly.
The main motivation for a seller to offer payment terms that include a discount for early payment is generally in the case the the business needs the payment sooner, and prefers to not wait potentially up to 30 days for the cash.
For example: Liz has just created an invoice for a customer of her photography business. She received a deposit before the job, but in order to ensure quick payment on the invoice she’s decided to offer the customer 5% off the remaining balance if they pay within 14 days of the invoice being issued. In any case, the buyer must pay within 30 days. In payment terms, this would be a ‘5/14 net 30 days’ example.
Payment terms cover a broad range of various transaction details when it comes to a sale. They can refer to when the payment should be made, but also how and under what conditions.
Specifying payment terms
There are a number of abbreviations and shorthand used to specify payment terms. For example, you might have come across: ‘CIA’ - Cash In Advance, ‘EOM’ - End of Month, for example. There are many of these, but it doesn’t hurt to write it out clearly for a customer.
When a discount is included for early payment, this is often cited in a specific way as well. This is sometimes seen as mentioned above - with the use of ‘net xx’ to indicate the number of days payment must be made after the invoice is issued. This is often combined with the details about an early discount, which provide the percentage of the discount within the number of days it will be honoured, such as ‘5/14’.
Where to include payment terms on an invoice
When you create an invoice, it is helpful and often necessary to include your payment terms on the invoice itself. This ensures that any previously discussed terms are clearly outlined when it comes time for payment.
If you’re working with a Word or Excel invoice template, you can often try to find a place to fit this information in, but be sure that it does not affect the overall layout of your invoice or this can affect the level of professionalism your business portrays.
However, if you’re working with online invoicing software like Debitoor, there are dedicated sections for information such as notes intended for the customer, as well as payment terms. It’s even possible to include these messages by default, so that there’s no need to type them in each time.