For corporations and sole proprietors, money-related aspects such as funds, sales, and finances are key to running a business.

The phrase “payment terms” refers to the various terms and conditions of payment for goods and services, such as payment methods and deadlines, which are agreed in advance.

For a business to enter into contracts with another, it’s important that the payment terms are clearly presented and that they are negotiated and agreed between the parties.

This article introduces the basics of payment terms, including payment deadlines, types of payment methods, and examples to add to descriptions, as well as points to keep in mind when setting them and receiving requests for changes.

What’s in this article?

• What are payment terms?
  
• Two common details specified in payment terms
  
• Setting payment terms or receiving a request to change them
  

What are payment terms?

As explained earlier, payment terms refer to the conditions for settling the invoice, incurred as compensation for the work provided. When buying or selling goods or services (transactions), it’s important to specify “how much,” “by when,” and “by what method” as payment terms in advance to avoid problems later.

Payment terms aren’t just used in B2B dealings; they also appear in our personal lives in transactions—for instance, when individuals take out loans for purchases such as cars and homes.

While the provider and client should ideally agree on payment terms, in practice, the conditions set by the provider at the initial quote stage are typically followed.

Why are payment terms necessary?

Some might think establishing payment terms are so mundane and formal that it needs no special consideration. However, they are significant for companies when signing a contract.

Failure to authorize payment terms when doing business increases the risk of delays in payment and other negative cash flow impacts. For example, not establishing them can lead to problems such as discrepancies between the amount invoiced and the amount received, payment not being made on time, or payment being made by a different method when it needs to be by wire transfer.

Therefore, payment terms are key for smooth transactions, as they significantly impact a company’s cash flow. It’s especially important to agree on the due date in advance as a condition of payment, because ”pay late and collect early” provides more room for cash flow.

The details of the payment terms need to also be clear and straightforward to understand so that both parties can proceed with the transaction in a mutually agreed and amicable manner.

Two common details specified in payment terms

The first two major types of payment terms are commonplace: “Payment Due Date/Time” and “Payment Method.” This section describes these requirements.

1. Type of due date/time for payment

There are four main types of payment due dates/times as follows.

Specifying a date

If the delivery date is fixed, a payment date could also be specified. When specifying a date, simply state, “Payment is due by: Day/Month/Year.”

Month-end closing, next month-end payment (or closing at end of month, payment end of next month)

In the case of ongoing work, “month-end close, next month-end payment” is the most common. In this instance, a closing date is set, and the amounts invoiced up to it are paid together at a later date. The closing and payment due dates are not limited to the end of the month but vary from company to company, such as “the 15th of the following month” or “the end of the month after the following month,” and can be set at their discretion. It’s important to make the closing date and payment due date clear.

By a specified date after delivery

In the case of a one-time delivery of goods rather than an ongoing transaction, it is common to specify within several days from the delivery date. Since this is often used when invoicing is required for each one-off transaction, it is advisable to indicate the payment due date in the quote submitted in the early stages before the contract is signed.

Partial payment in advance at the time of contract, remaining payment after delivery

For transactions where the amount is particularly large, there is a pattern where “part of the price is paid in advance at the time of contract, and the balance is paid within a certain number of days after delivery.” For example, “One-third of the price will be paid at the time of contract and the balance will be paid in a lump sum by wire transfer within 60 days after delivery,” which should be clearly stated in the offer or contract.

2. Type of payment method

There are three basic payment methods specified in the payment terms, as follows.

Cash payment

If payment is to be made in cash, the parties to the contract must decide in advance where the money will be paid and received to avoid problems later. For instance, in a typical case, the customer goes to the store where the contract was signed, and the supplier collects the money at the delivery location when the goods are delivered.

Wire transfer to designated bank account

For direct deposit, the following payee information must be included on the invoice (the address and phone number might be required by the financial institution or office to which the funds will be sent).

• Name of financial institution
  
• Account type (ordinary or checking)
  
• Account number
  
• Account holder
  
• Phonetic spelling of the account holder
  
• Address
  
• Phone number
  

Draft or check

Drafts and checks are both securities. A draft is an instrument that promises to pay the amount stated in the draft by a specific payment date agreed upon with the counterparty. Checks can be cashed immediately upon receipt.

In the case of drafts, the payer has more time to prepare the funds. This has the advantage that if the balance is insufficient when signing the contract, it only needs to be prepared by the payment due date, giving the borrower more time for cash flow.

On the other hand, since drafts differ in nature from checks, which can be cashed immediately, the payee should fully understand that it will take a few days to be credited before accepting a draft payment. It is also important to consider the reliability of the company issuing the draft (the drawer).

Other types of payments made between businesses

In addition, credit cards are sometimes used for B2B payments. For example, credit cards with high spending limits, called corporate cards, are used for B2B payments for large invoice amounts.

The introduction of credit card payments eliminates the need for businesses to decide where to pay each other, as is the case with cash payments, saving time and effort. Credit cards are also convenient because they don’t require processing during the financial institution’s business hours such as bank transfers, and don’t incur fees.

Credit card payment in B2B transactions is still relatively uncommon. Still, as cashless payments become more widespread, it’s likely that companies will increasingly adopt credit cards for these transactions in the future.

Accommodating cashless transactions

As cashless transactions continue to increase, it’s important to consider using payment tools and features that can be customized to meet a variety of needs.

Stripe provides various financial and payment-related functions and tools to help online platforms improve their back-office operations and grow their businesses. Companies looking to monetize their business can implement Stripe Payments and Stripe Invoicing, which support cashless payments, to ensure that transactions from customers can be processed smoothly and effectively. These no-code solutions are simple to use and quick to set up, getting you up and running in no time.

Setting payment terms or receiving a request to change them

Bank transfer fees

Responsibility for bank transfer fees is usually stated in the quote, contract, or invoice.

In the case of bank transfers, it’s important to agree in advance on who will pay the transfer fee and to establish this clearly in the payment terms.

People often feel uncomfortable talking about money and payments and might try to avoid discussing it directly. However, to avoid any misunderstandings, it’s key to state in writing who will be responsible for wire transfer fees as a condition of payment.

Examples of what to include as payment terms in a quote

A quote is usually the first document you prepare when you receive a request. It is intended to present the details of a transaction for goods or services, but it’s also a valuable document that can be a first impression of your company.

This is why the service provider must ensure the quote is straightforward for the customer to understand and that the payment terms and other conditions are clearly stated so the transaction proceeds smoothly.

For quotes, similar to “Two common details specified in payment terms” described in the first part of this article, the two main payment terms are “payment due date” and “payment method” (e.g., “ within ◯ days after delivery ”).

Remember to state who will be responsible for the bank transfer fees mentioned above at the quote stage. When asking the customer to be responsible, be as polite as you can and use phrases such as:

• “Bank transfer fees are the responsibility of the customer.”
  
• “You are responsible for all bank transfer fees when making payment.”
  

If any other information that would be useful to the customer or details that might persuade them to use your services need to be contained in the quote, you can add it in the comments section. Below are examples of selling points that could be included in the listing along with payment terms:

• “Free shipping if you make a reservation by MM/DD.”
  
• “Get 30% off your first delivery if you sign up by MM/DD.”
  

When preparing a quote for a customer, clearly present the payment terms that the customer needs to know before making the purchase, such as the price of the goods or services, the delivery date, and the payment method and deadline. After submitting the quote, the customer can confirm the details and agree to enter a contract.

Money-related documents contain quotes, purchase orders, contracts, delivery slips, acceptance inspection slips, and invoices.

Payment terms need to be included in these documents and in the proposal, but there are no specific rules for how to write the agreements; they vary from document to document, and the complexity of the descriptions also varies from them as well. Additionally, some documents, such as purchase orders, could be omitted if they don’t require much detail or if the content is duplicated for each document issued.

When a business partner requests a change in payment terms

In such cases, accepting requests readily and unconditionally can affect future cash flow. That’s why it’s important to respond carefully to them for changes in closing dates and payment terms.

A key point to keep in mind is that to maintain a relationship of trust in business dealings, it’s imperative to communicate well regularly and handle requests for changes appropriately.

The party requesting the change needs to communicate the nature of the adjustment and the reason for the change.

The party receiving the change request needs to consider its options: accept the change, propose alternative conditions, decline and negotiate, or reject. It helps to be as flexible as you can, assuming you want to do business with them in the future.

If the request is rejected, the reason for the rejection must be stated politely and clearly in order to maintain trust.

Therefore, it’s important to find a mutually acceptable and fair solution to requests for changes in payment terms, and to negotiate the details of the adjustment with the other party to reach an agreement.

Lastly, be mindful to document the agreed changes in payment terms.