Payment terms are the agreed-upon conditions between a customer and seller regarding when and how the customer should make payments for goods or services. These terms set expectations for both parties and outline details such as the timing and payment method and potential discounts for early payments or penalties for late payments. Unpaid invoices are a problem for businesses worldwide. For example, late payments cost small businesses in the United Kingdom an estimated £1.6 billion in 2023. Strict payment terms can help prevent invoices from becoming overdue.
Below, we’ll explain what standard payment terms mean, how to pick and customise payment terms for your clients, and how to talk about payment terms with clients.
What’s in this article?
- Common payment terms and what they mean
- How to pick payment terms that work for you and your clients
- Should you customise payment terms for different clients or projects?
- How to talk about payment terms to clients – and what to do if they push back
Common payment terms and what they mean
Here are common payment terms and what each means:
Net 30, net 45, and net 60: Payment is due within a specified number of days after the invoice date. For example, “net 30” means the customer should pay within 30 days of receiving the invoice.
2/10 net 30: Payment is due within 30 days of receiving the invoice. If the customer pays within 10 days, they receive a 2% discount.
Due on receipt: Payment is due as soon as the invoice is received.
Cash on delivery (COD): Payment is due at the time of delivery of goods or services. This often applies to physical goods rather than services.
End of month (EOM): Payment is due at the end of the month in which the invoice is issued, regardless of the invoice date.
15 MFI (month following invoice): Payment is due on the 15th day of the month after the month in which the invoice was issued. For example, an invoice dated 20 April would be due on 15 May.
Prepayment or advance payment: Some or all of the payment is due upfront. This is often required before a service or order starts, especially for custom or high-value items.
50% up front, 50% on delivery: Payment is split into stages, with 50% due before work begins and 50% due on delivery. This is often used for larger or more complex projects.
Net monthly account: Payment is due at the end of the month following the invoice date. For example, an invoice dated 23 March would be due on 30 April.
Line of credit payment: Payment is made according to a pre-arranged credit agreement, by which invoices can be paid over a longer term under agreed conditions.
How to pick payment terms that work for you and your clients
Choosing the right payment terms comes down to balancing your business’s needs with your client’s payment experience. Set terms that work for both parties:
Start with your cash flow needs: Figure out how soon you need cash to keep your operations humming. If cash flow is tight, shorter terms such as net 15 might be ideal. But if you can afford more flexibility, net 30 or net 60 might make sense, especially if it aligns better with your clients’ schedules.
Know your client’s payment rhythm: Bigger businesses often have strict billing cycles and might prefer something longer, such as net 60 or net 90. Small businesses, on the other hand, might work better with shorter terms but might also need flexibility if they’re tight on cash.
Offer early payment discounts: Incentivise prompt payments by offering discounts for early payment, such as 2/10 net 30 (2% discount if paid in 10 days). Before you do this, make sure the early payment will benefit your business enough to make it worthwhile.
Break down payments for big projects: Break payments into instalments for substantial projects – for example, “50% upfront, 25% midway, and 25% upon completion”. This keeps cash flowing throughout the project and minimises the risk of a large unpaid bill at the end.
Talk to your clients, and be flexible: Discuss terms openly before finalising. Adjusting terms to fit a client’s cycle can strengthen the relationship and build loyalty. If your client wants net 60 and you prefer net 30, consider net 45 as a good middle ground.
Add late fees for security: A late fee (e.g. 1%–2% per month) can encourage timely payment. Make sure you communicate late fees up front so they don’t surprise clients.
Consider industry norms: Each industry has its own standard. Construction, for example, often has longer terms, while retail might use shorter terms or COD. Matching industry standards can make it easier for clients to adjust.
Adjust terms based on your relationship: More generous terms can build loyalty for clients with a strong payment history. Stricter terms – such as partial prepayment or shorter timelines – can be a good idea for higher-risk clients until you’ve built trust.
Should you customise payment terms for different clients or projects?
Customising terms can make payments more manageable for your clients and help you get paid on time, so consider this when it won’t overcomplicate your business’s situation. Here’s when it works best and how to keep it simple:
Match terms to how your client pays: Bigger businesses might have set billing schedules and prefer longer terms, such as 60 or 90 days, while smaller businesses often appreciate shorter terms, such as 15 or 30 days. Setting terms that fit your client’s payment habits can make it easier for them to pay you on time without surprises.
Consider the project scope: For large projects, breaking payments into stages can keep cash coming in while you work so you’re not left waiting for a lump sum at the end.
Balance flexibility with consistency: Be flexible when possible, but keep your system simple. If a client regularly needs extra time, you could create a custom plan that works for both of you. Too many variations can make things messy, so stick with a few clear options that cover most situations.
Build in a safety net for new clients: You might go with shorter terms or require a deposit up front for clients you haven’t worked with before. Once you build trust, you can consider adjusting terms to fit their needs better.
Know when to say no: Sometimes, customising terms isn’t worth it if it puts too much strain on your business. It’s okay to keep standard terms or negotiate if a client’s request feels risky.
How to talk about payment terms with clients – and what to do if they push back
Talking about payment terms is easier when you’re upfront and confident in your approach. Most clients will appreciate knowing what to expect, and for those who push back, flexibility or compromise can go a long way – as long as it still works for your business.
Here’s how to bring up payment terms naturally and handle any pushback:
Start with clarity, not apologies
When you bring up payment terms, state them plainly without apologising or acting as if they are negotiable. This lets your clients know these terms are normal and expected.
- Example: “Just to confirm, our standard terms are net 30, which means payment is due 30 days after the invoice date.”
Explain the “why” behind your terms
If a client questions your terms, keep it simple. Most clients understand prompt payment helps you keep projects moving and costs in check.
- Example: “We use these terms to keep cash flow steady so we can focus on providing great service.”
Offer options
If you sense a client might need flexibility, mention that upfront without making it the default. This shows you’re open to working with them but within reason.
- Example: “For bigger projects, we sometimes break payments into stages – such as 50% upfront and 50% at the end – so that everything flows smoothly.”
Address pushback with confidence
If a client pushes back, ask open-ended questions to understand why. Their answer will help you gauge whether a slight adjustment is workable or whether they’re looking for something you can’t (or shouldn’t) accommodate.
- Example: “Can you tell me more about your typical payment process?”
Find a middle ground – but protect yourself
If they request extended terms, see whether a compromise still works for you, such as a partial deposit. This shows you’re willing to meet them halfway but not take on all the risk.
- Example: “We can extend the timeline to 45 days, but we’d need 20% upfront to get started.”
Know when to hold firm
It’s okay to say no if the request doesn’t feel right, especially with new clients or larger invoices.
- Example: “To make sure everything stays on track, we need to stick to these terms. Let’s review them together and see whether we can make this work.”
Put everything in writing
Make sure you document everything you agree on in your contract or invoice. This avoids any confusion and gives you and your client something concrete to refer to.
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.