What you need to know about payment terms
Payment terms regulate the payment that customers must make to a company for a delivery or service. Companies have a great deal of freedom in the design of their payment terms. However, it makes sense to stick to common formulations in order to avoid misunderstandings. We will show you here what this can look like with the help of a few examples.
In the payment terms, a company specifies which conditions apply to its customers when paying their invoices. For example, when customers place an order in an online shop, they accept the seller's payment terms. If they do not, no business contract is concluded.
Payment terms apply wherever money is exchanged for goods or services. Payment can be made in various ways, e.g. by advance payment, payment on receipt of goods, or payment on account after receipt of goods.
The payment terms in the form of payment deadlines or payment periods are stated on the invoice, indicating the latest date by which the invoice must be paid. It may also indicate that a discount may be deducted for early payment.
Companies in the UK often choose the standard payment term of 30 days for their payment terms on invoices. This corresponds to the legal payment term. However, any other payment term can be chosen.
However, it must be ensured that customers can also meet these deadlines. Less than 7 working days is therefore unusual.
It is in a company's interest to be paid as early as possible. This means that up-front payment is best. Customers then pay the full amount or a partial amount before the company provides the service or delivery.
However, up-front payment is not always possible or can lead to customers choosing another company where they can pay on account. To avoid this, a compromise can be made: Offering discounts for earlier payment.
Customers receive an invoice upon delivery, which is payable in 30 days, for example. However, if they pay within 7 days, they can deduct a certain percentage (discount rate) from the invoice amount. This reduces the company's profit, but ensures a faster cash flow.
To illustrate the payment terms, we present some common situations from practice.
If a company wants to be paid in advance for its service or delivery, this must be communicated to the customer when the sales contract is concluded. The amount to be paid in advance can be the full invoice amount or only a part of it.
Upfront payment terms look like this, for example: "Please find attached the invoice 12345 for our delivery/service. The total amount is £2,000, with an upfront deposit of £200 due by xx/yy/zzzz.
Our bank account details can be found below. Thank you very much"
30 days payment terms are often referred to as net 30 on invoices. This means that customers are granted a payment period of 30 calendar days (not working days).
The shortest form on a bill looks like this: "Payment terms: net 30"
Instead of 30 days, you can also give your customers a shorter or longer payment term, for example net 14 or net 60. However, to avoid confusion, we recommend that you emphasise the payment term even more clearly, because some customers do not know what the term net xy means. You can then formulate the payment terms like this:
- Payment terms: Payment is due within 30 days of invoice date
- Payment terms: Payment due 15 June, 2022
If you grant your customers a discount for earlier payment, you can also choose a short form, for example:
- 2/10 net 30: 2% discount when paid within 10 days; later payment: full amount
- 4/14 net 60: 4% discount when paid within 14 days; later payment: full amount You can also write out the short form:
- Payment terms: 2% discount for payments made within 20 days; 30-day due date
Immediate payment is referred to on an invoice as payment due upon receipt. This means that the invoice must be paid immediately upon receipt. Please note, however, that it may still take a few days before the transaction is credited to your account. We therefore recommend that you specify a clear date or deadline instead of immediate payment:
"Payment terms: Payment is due within 7 days of invoice date".