Understanding payment terms: best practices & strategic insights for cash flow optimisation

Having a good understanding of payment terms is essential for any business, regardless of its size or the sector it is in. According to a report by the UK Department for Business and trade, 30-day payment terms are the most common payment terms between businesses, with some micro businesses offering even shorter payment terms.

Knowledge of the different types of payment terms, and potential discounts from early payment (and penalties from late payments) is imperative, as these variables can have a direct impact on cashflow. In this article we’re going to explore what payment terms are, the common types of payment terms, and the pros and cons of net payment terms.

What are payment terms?

Define payment terms

Payment terms are contractual conditions that specify when and how payment should be made for goods and services. They are agreed upon between the buyer and the seller, and are typically stated in contracts, proposals, and invoices.

Payment terms are typically stated on both the contract or proposal, and the final invoice when issued to the payee.

Invoice terms and conditions

Invoice terms and conditions specify not only the payment due date, but also details such as accepted payment methods, late payment penalties, early payment discounts, and any other obligations or instructions for the transaction. They are included directly on the invoice and are essential for setting clear expectations between buyers and suppliers.

Payment terms example: What are the most common payment terms?

One of the most common payment terms is “Net 30,” meaning payment is due within 30 days after the invoice date. Other examples include “Payment due on receipt,” “Net 60,” and “2/10 Net 30.

There are several types of payment terms such as net payment terms, payment on receipt, partial/upfront payments. Payment discounts can also be offered for early payments. Here is a more detailed look at the different payment types:

Net payment terms 

Net payment terms indicate that a payment is due within a certain number of calendar days once goods or services have been delivered.

Payment on receipt

Payment on receipt means that payment for goods or services becomes due immediately on receipt of the invoice.

Payment in advance

Also known as partial or upfront payment, this is where a vendor requires either payment in advance for goods or services. This could be in the form of a partial payment, or payment for the full sum, in advance. An example of this would be a construction company requesting a deposit prior to commencing a building project.

What are invoice payment terms?

Invoice payment terms are the terms between two businesses related to the timeline for settling the  outline of how and when payment for goods or services should be.

What do net payment terms mean?

Net 30 meaning

In a large number of cases, businesses will require payment within 30 days, which would be stated on an invoice as “net 30”. This means that the receiver of goods or services can pay up to 30 days after they receive the invoice. This does not include business days, so net terms are based on calendar days.

As a supplier or distributor, offering net 30 payment terms simply means that you’re giving your customer 30 days to pay for goods or services you’ve provided.

Net payment terms can often be as short as Net 7, Net 10, or Net 15, requiring payment within 7, 10 or 15 days respectively, but they can also be as long as Net 60 Net 90, and even Net 180 in some cases.

Net 60 meaning

Net 60 payment terms mean that an invoice should be settled within 60 calendar days of its issue date. This extended payment period is often used when working with larger clients or in industries where longer payment cycles are standard. For sellers, Net 60 can create cash flow challenges, while buyers may benefit from additional liquidity

Net 90 meaning

Net 90 means that a business has 90 days to pay an invoice from the date it is issued. These very long terms are usually reserved for major corporations or specific sectors such as retail and large-scale manufacturing. While Net 90 can help buyers preserve working capital, it can put significant strain on the seller’s cash flow. Businesses should weigh the potential risks and consider using payment reminders or negotiating shorter terms when possible.

Early payment discounts

Some invoices will list an early payment discount within their payment terms. For example, if a firm stipulated terms of net 30, but offered a 2% discount if the invoice was paid within 10 days, this would show as 2/10 Net 30.

Table: standard payment terms and what they mean

Advantages of net terms

From a purchaser's perspective, longer net terms are advantageous, as this means more time to pay an invoice. However as a supplier, longer net terms means that payment is received later, which can impact cashflow.

From a vendor's point of view, the advantages of net terms are:

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  Gaining larger clients: Many larger companies require net payment terms as they place larger volume orders for goods and services.

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  Strengthening client relationships: Providing customers with more flexibility means that client retention is likely to be higher. Customers who receive favourable payment terms are likely to return, and stay with a business for the long run.

From a buyer's point of view, the advantages of net terms are:

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  Increased cashflow: Net payment terms are almost like receiving interest free credit, which allows a business to benefit from improved cashflow

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  Discounts from early payment: Buyers can benefit from discounts by paying invoices early

Disadvantages of net terms

Whilst there are some pros to payment via net terms, there are also a number of drawbacks:

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  Difficulty in keeping track of payments: Net payments, especially over 30 days can be harder to manage and keep track of.

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  Increased risk of defaulting on payments: Buyers can become too relaxed in their approach and take net payments for granted, which increases the risk of non payment

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  Lost opportunities: Having to wait to be paid means that there is an opportunity cost of not having access to funds to either reinvest in the business, or bring down debts.

Why payment terms matter for business strategy

Payment terms can impact a business in a number of ways, from affecting supplier relationships to cashflow. Here are some further insights on the importance of payment terms for business strategy:

Impact on cashflow

The type of payment terms on an order for goods and services has a direct impact on cashflow for both the vendor, and the customer. For example, a longer payment term such as net 90 is preferential to a customer, as they have longer to pay and they are effectively receiving trade credit without incurring any interest.

However, the vendor would (in most cases) prefer as short a payment timeframe as possible to keep cashflow positive. This is especially the case for small businesses. For example, net 10 or net 15 would be the most beneficial to a small business as they would be able to benefit from increased liquidity.

Agicap's features allow users to automate the tracking of accounts receivable , helping businesses reduce their Days Sales Outstanding (DSO), the average time it takes to collect payment for invoices. 

This helps with faster payment collection, which leads to better cashflow. This is a feature that one of Agicap's clients has benefited from greatly: "Thanks to Agicap, we improved our cash flow position, reduced our average collection times by around 20 days, and thus regained cash flow levels that satisfy us" - Simon Rauturier, CFO of Plenetude Group. 

Relationships with suppliers

It is crucial to build and maintain strong relationships with suppliers, as for many businesses it can mean the difference between success and failure. Although as a business, any bonuses like a longer payment time frame are beneficial, it is also important to strike a balance between keeping suppliers happy so they are there when they’re needed most.

This is where negotiating a middle ground with a potential discount for early payment can keep a business on top of its cashflow and finances.

Late payments and risk

Not making payments on time can have a detrimental impact on a business, not only due to the potential penalties this can incur, but it can also lead to mistrust and damage the relationship with suppliers. The best way to avoid this is to clearly set out the payment terms on invoices and proposals.

Financial forecasting

Accurate cashflow forecasting, budgeting, and financial planning is directly linked to the payment terms of a contract. Agicap's unique platform is a perfect way to manage all of these aspects in one central location, and having clear payment terms from the outset can help maximise the accuracy of all these aspects.

Agicap's expense planning tools enable users to fully understand when their expenses and financial obligations are due, which can help them determine what type of payment plans would suit the business best.

For example, using the Agicap platform for expense planning can help a company decide whether offering payment terms such as a net 60 are financially viable, as they may be better off offering a net 30 payment term setup, or even shorter.

To learn more about how Agicap's unique platform can help you improve cash flow forecasting, budgeting, and manage the varying payment terms across invoices, book a demo with our sales team.

Optimising your payment terms: The essentials

Payment terms play a critical role in how businesses transact, helping to attract new customers and foster long-term relationships. While offering attractive payment terms can be beneficial for growth, it is essential to weigh their potential impact on cash flow and the risks associated with late or non-payment.

With robust accounts payable management features, businesses can gain complete visibility over supplier invoices, payment schedules, and order tracking—enabling better control of their financial position and outstanding obligations. The Agicap platform brings all these elements together, providing an intuitive, centralised solution to manage every aspect of payment terms efficiently and with confidence. 

FAQ

How are payment terms determined?

Payment terms can differ substantially depending on the two parties involved, and are typically determined by the particular good or service in question, the industry, along with the buyer and supplier relationship.

What are reasonable payment terms?

Reasonable payment terms are typically Net 30 or Net 30 end of month, meaning payment is due 30 days after invoice. For some clients or industries, Net 45 or Net 60 may also be acceptable, as long as both parties agree and cash flow remains healthy.

What payment terms are used on invoices?

Common invoice payment terms include Net 30, Net 60, Net 15, payment on receipt, and 2/10 Net 30 (2% discount if paid in 10 days). Terms should be clearly stated and reflect your agreement with the customer.

What do 30, 60, and 90 day payment terms mean?

30, 60, and 90 day payment terms relate to the time frame in which an invoice must be paid. For example, 30 day payment terms would mean that an invoice must be settled within 30 calendar days of the invoice being received.

When is payment due?

The payment due date depends on the agreed terms—such as Net 15, Net 30, or payment upon receipt. Always check your invoice for the clear statement: "Payment due by [date]".

What are construction payment terms?

In construction, payment terms often involve upfront deposits, milestone-based payments, or “pay-when-paid” clauses. These help manage cash flow during multi-phase projects and differ from standard Net 30 terms typically used in other industries.