15 Accounting Payment Terms and How to Work With Them

What are payment terms?

When you send your customers an invoice, the payment terms set the expectations regarding future payment. They let your customers know how you prefer to be paid, and when they need to pay you by. 

The payment terms will also sometimes include the penalties for a missed or late payment. It’s important to set up transparent payment terms, so your customers know what to expect. The more straightforward these are, the easier it will be for your customers to pay you on time. 

What do invoice payment terms include?

When you send a new invoice to a customer, it should include all the information they require to pay you accurately and on time. Here is an overview of the information you should include.

• The invoice date: This is the date when you’re sending the invoice.

• The due date: The due date is when you expect to receive payment on the invoice – many invoices include standard payment terms like Net 14 or Net 30. (You’ll learn more about those terms below.)

• The invoice number: The invoice number allows your customers to keep track of all the invoices you send them.

• How much the invoice is for: The invoice should clearly state how much the customer owes you.

• The currency you want to be paid in: If you frequently work with international clients, you may want to specify the currency you want to be paid in.

• The payment methods you accept: The invoice should include a list of acceptable payment methods. For instance, you might accept credit cards, online payments and ACH payments.

• Other payment terms: Your invoice should include any other payment terms the customer needs to know. For instance, you’ll want to include early payment discounts or if you expect an upfront deposit. 

Common payment terms

Payment terms are usually included on an invoice as an abbreviation. Here are some of the most common invoice payment terms you need to know.

• 1MD: This denotes a payment credit for a full month’s supply.

• PIA: This stands for “payment in advance,” meaning payment must be made in full before the goods or services will be delivered. 

• CIA: This stands for “cash in advance,” which means the full payment must be made in cash before the goods or services will be delivered.

• Upon receipt: Payment is expected as soon as the client receives the invoice. 

• Net 7: Payment is due in seven days.

• Net 21: Payment is due in 21 days.

• Net 30: Payment is due in 30 days. You’ll also sometimes see Net 60, Net 90, etc.

• EOM: Payment is due at the end of the month in which the invoice was received. 

• 15 MFI: Payment is due on the 15th of the month following the invoice date. 

• 2/10 Net 30: Payment is due in 30 days, but the customer can receive a 2% discount for payment within 10 days. 

• COD: This stands for “cash on delivery,” which means the goods or services must be paid for in cash at the time of the delivery.

• CND: This stands for “cash next delivery,” which means the payment must be made before the next delivery. This payment term is usually reserved for recurring deliveries. 

• CBS: This stands for “cash before shipment,” which means the balance must be paid before the product is shipped to the customer.

• CWO: This stands for “cash with order,” which means the customer needs to pay the invoice in full before the goods will be produced and shipped. 

• Accumulation discount: This is a discount given on a large order. 

Importance of payment terms

Your small business’s cash flow depends on how quickly your customers pay you. Having clearly defined payment terms will make it easier to forecast cash flow, take on new projects, and invest in new opportunities. 

If you are too lax on the payment terms or don’t follow up with customers who have outstanding balances, your business’s cash flow could suffer – something that causes 82% of small businesses to fail, according to a U.S. Bank study. 

How to use payment terms

You can use payment terms to control how and when your customers pay you. These terms set the expectations on payment from the start, so you avoid any confusion down the road.

Here are a few tips on how to use payment terms to your advantage:

• Ask for upfront payment. In some cases, you may want to ask for payment upfront. This can be a good choice for service providers who want to guarantee payment before they get started on the work.

• Request a deposit. If it isn’t realistic to require a payment upfront, consider asking for a deposit. For instance, requesting a 50% deposit is a good option for larger projects.

• Create monthly retainers. If you have clients you work with on an ongoing basis, you can set up a monthly retainer for them. This is a set payment amount you agree to every month. 

• Set the invoice terms. If you do work for clients on and off, you’ll need to decide on the invoice terms. For instance, you can set the invoice terms to be due upon receipt, or you could choose payment terms as long as Net 90. It all depends on what makes sense for you and your client. 

How to set up effective payment terms

If you struggle to get your clients to pay their invoices on time, you may need to set up more effective payment terms. Here are seven tips for setting up better payment terms for your clients. 

1. Use accounting software.

First, you can simplify your invoicing process and finances if you use accounting software. The right accounting software will allow you to send invoices more quickly and with fewer errors. 

Plus, you’ll be able to track your upcoming payments, send automated late payment reminders and easily reconcile your account. And accounting software will ensure that your financial records stay organized and that you’re prepared for tax season. 

2. Be upfront about your payment terms.

Before you start working with a new customer, make sure they understand and agree to your payment terms. Explain the terms verbally to your client and include a written description in the contract you send. This will help eliminate any misunderstandings about how much customers owe you and when payment is due. 

3. Be polite.

Want an easy hack for getting your clients to pay you faster? Be polite when you invoice your clients, and include the words “please” and “thank you” somewhere on the invoice. 

A study by FreshBooks found that invoices that include a “thank you” in the invoice terms get paid almost 90% faster. And 45% of those invoices get paid in seven days or less, while 12% get paid in 14 days or less. Using “please” has a similar result; these invoices get paid 88% faster. 

4. Offer a variety of payment methods.

Have you ever tried to make a purchase at a store and discovered that the business only accepts cash payments? Think about how you felt when you realized this – were you frustrated and annoyed by the inconvenience?

That’s likely how your customers feel if you offer them limited payment options. If you want them to pay on time, make it as easy for them as possible. Offer various payment methods such as credit cards, debit cards, online payments, ACH or even cryptocurrency payments. 

5. Set shorter payment terms.

One of the best ways to get your clients to pay sooner is to shorten the due date. It sounds obvious, but if you give your clients a long time to pay, they will usually take it. 

For many industries, Net 30 is considered the gold standard for payment due dates. That’s a good time frame, but if you have a client who regularly ignores your Net 30 due date, you might consider shortening it to Net 21 or Net 14. 

6. Be flexible.

Obviously, you want your clients to pay you on time, but you do want to recognize that sometimes you’re working with another business, and that company may grapple with cash flow issues of their own. Some businesses simply cannot accommodate Net 14 or even Net 30 payment terms, and will appreciate more flexible conditions.

7. Offer a discount for early payment.

Think about offering an early-payment discount to your customers. For instance, your standard terms could be Net 30, but customers receive a 2% discount if they pay the invoice within seven days. 

So, if you send your customer a $5,000 invoice, they’ll receive a $100 discount for paying the invoice early. These discounts add up over time, so many customers may take advantage of that. 

Of course, this type of discount means you’ll accept less money on the invoice. But the improved cash flow may be worth it for your business.