What are payment terms?

What are payment terms?

Payment terms are policies set by businesses that define when, how much, and how payment should be made for goods/services. Payment terms are crucial for a business’s cashflow management as they reduce payment risk, and bridge the gap between customers and business. They outline the amount owed, due date, accepted payment method in a transaction between sellers and buyers. They establish the timeline, methods, and requirements for payment agreed upon by both parties. Among common payment terms are:

Net terms: It is the most typical format, where “Net 30” means payment is due within 30 days of the invoice date. Other common periods are net 60 payment terms, net 15, or net 90.

Due on receipt: It indicates that payment must be made immediately upon receiving the invoice.

Cash on delivery: Payment must be made with the delivery of goods/services.

Advance payment: Full or partial payment is required before shipping of goods/services provided.

Early payment discounts: Incentives such as 2/10 Net 30, meaning a 2% discount if paid within 10 days; otherwise, full payment is due in 30 days.

Payment terms also specify acceptable payment methods such as credit card, wire transfers, and check, any late payment penalties, alongside any other conditions. These are often outlined in contracts, invoices, or purchase agreements to avoid confusion and ascertain that both parties are well aware of their obligations.

The importance of payment terms lies in their ability to strengthen the cash flow management process, reduce payment delays, and maintain healthy business-customer relationships. Various industries have different payment terms that reflect their business cycles and risk levels.

What are payment terms’ examples?

Businesses often utilize standard payment terms for daily transactions for credible customers. Sometimes payment terms are transaction- or customer-specific. Some examples of payment terms are

Advance Payment Terms

Cash in advance

In this case, payment is required before order shipment, and this helps eliminate the seller’s risk of non-payment. This payment term is common for new customers or high-risk transactions.

Payment in advance

In this case the customer pays before delivery or the project begins. It is often used in the construction business, thereby providing capital for the seller.

Cash with order

Payment must accompany the order submission. Here, Cash with order ensures immediate payment commitment and reduces any risks of order cancellation.

Cash before shipment

In this case, payments are required before goods/services are delivered. Payments are typically made directly to the seller via bank transfer, credit card, or other accepted methods. Once payment is confirmed, the seller proceeds with the shipment. Delivery companies are not involved in processing or managing payments under this term.

Cash on Next Delivery

Customers must pay for the previous order to receive the next shipment. This is mainly used for recurring delivery services and maintains ongoing payment discipline.

Standard Net Terms

Net 30

It indicates payment is due within 30 days of the invoice date. It is the most common payment term for established customers, and no early payment discount is offered in this case.

Net 60

Payment is due within 60 days of the invoice date. Extended terms for larger transactions are offered, and this type of payment term is often used for seasonal businesses.

Net 15, Net 45, Net 90

Payment is due within 15, 45, or 90 days, respectively. Payment terms are customized based on industry standards or customer relationships.

Early Payment Discount Terms

2/10 Net 30

2% discount if paid within 10 days. Full amount due within 30 days if discount not taken.

1/15 Net 45

It indicated a 1% discount if paid within 15 days, and here full payment is due within 45 days. Moreover, smaller discounts are offered for longer discount periods.

Month-Based Payment Terms

End of month

Under such payment terms, payment is due on the last day of the invoice month. This helps to simplify monthly cash flow planning.

Monthly following invoice

It means that the customer is expected to pay their dues by the pre-decided date. For instance, 20 MFI means payment is due on the 20th. However, if an invoice is issued after the 20th, it will be due on the 20th of the following month. If an invoice is issued before the 20th, it will be due on the 20th of the same month.

Risk-based Payment Terms

High-risk customers

These customers are often assigned CIA, PIA, or COD terms. These terms are determined by credit department assessment and protect against non-payment.

Creditworthy customers

They may be eligible to receive extended net terms such as net 60 payment terms or net 90 payment terms. These are eligible for early payment discounts and often reflect established payment history.

How to choose the right payment terms?

Payment terms must be chosen after analyzing the cash flow requirements of the company, knowing the clients’ payment pattern, industry standards, and competition, as well as business model considerations.

Here are details of each of the mentioned factors to consider:

Cash flow analysis

Businesses, when deciding upon payment terms, must consider cash flow requirements. This necessitates conducting a thorough working capital analysis before the establishment of payment terms. Understanding liquidity requirements helps to ensure operational efficiency and investment capacity knowledge.

Customer payment behavior analytics

Implementation of data-driven assessment of client payment performance is important. Businesses can consider seasonal payment cycles, credit reliability scoring, payment velocity metrics, and credit profile assessment to ensure payment terms are well-suited to customer needs and their behavioral patterns.

Market intelligence

Establishment of terms aligning with industry standards while maintaining competitive advantage over others is key to proper payment terms’ decision-making. You must consider:

• Industry standard payment term benchmarks
• Competitor payment terms ’analysis
• Sector-specific operational cycles

Business model type

Payment terms must strategically align with specific business model characteristics to optimize cash flow, improve operational effectiveness, and improve client relationships. Different business models present various cash flow patterns, risks, and operational needs that can affect optimal payment term structures.

How are payment terms used in automated billing cycles?

Businesses use payment terms in automated billing cycles to define the payment time, automate bills, send reminders to customers, offer incentives and discounts, implement late payment penalties, and establish credit terms for customers.

Define Payment Time

Businesses can set up payment time in their billing software so that the system knows when each invoice becomes due. That date triggers the billing workflow and saves the hassle of manually intervening and handling payments.

Automate Invoice Generation

The system automatically generates and sends invoices based on the billing schedule as per the payment terms. It triggers emails and SMS reminders even before the due dates and follow-ups after bills are overdue. This mitigates manual strain and allows smooth payment cycles.

Incentivize Customers

Businesses can benefit from payment terms to allow early payment discounts to those who pay before the due date. For instance, they may offer a 4% discount if the invoice is paid within ten days, thereby incentivizing prompt payments and improved cash flows.

Late Payment Penalties

Businesses can include late payment penalties in payment terms to discourage late payments. These penalties are often defined as a percentage of the outstanding balance and applied in case the payment is not received on the pre-decided due date.

Credit Terms

Payment terms also allow setting up limitations on credit for customers. Businesses can offer payment terms based on the creditworthiness of customers, thereby allowing those with strong credit histories to receive favorable terms.

How does SubscriptionFlow facilitate flexible payment terms?

SubscriptionFlow facilitates flexible payment terms by providing a variety of features that enable businesses to customize billing cycles, modify pricing models, automate payment processing, provide multiple payment methods and gateways, allow installment billing, and defer payments.

Here are details on each of the following:

Customize Billing Cycles

SubscriptionFlow allows businesses to set custom billing cycles, i.e., daily, weekly, monthly, annually, and more. This facilitates a variety of customer segments and allows flexibility in how and when invoices are generated. Businesses can easily configure billing frequency per plan and start and end dates aligned with customer needs and trial or ramp-up periods.

For example, a fitness app uses monthly billing for regular users but offers weekly billing for short-term trial periods and annual billing with discounts for loyal users.

Modify Pricing Models

SubscriptionFlow renders support for flat-rate, tiered, usage-based, hybrid, and custom pricing, which means businesses can apply payment terms such as Net 30 to complex plans. The system adapts billing logic based on how the product is priced.

Automate Payment Processing

Invoices are generated and payments are processed automatically based on payment terms. For instance, a customer with Net 15 terms will be reminded accordingly, and charges will be triggered within that window. Our platform allows retry logic for failed payments and integration with dunning workflows.

Suppose a SaaS CRM tool bills users on Net 15 terms. If payment fails, SubscriptionFlow will retry the charge twice before triggering a dunning email sequence with payment reminders.

Provide Multiple Payment Methods and Gateways

SubscriptionFlow supports credit/debit cards, bank transfers, wallets, and third-party gateways such as Stripe, PayPal, and more. This flexibility allows businesses to match payment methods with customer-specific norms, especially for international subscription management. For example, an e-learning platform accepts USD payments via PayPal and EUR via SEPA bank transfers, making regional billing convenient.

Allow Installment Billing

Customers can split high-value subscriptions into manageable parts with custom terms for each installment. Each installment has its own due date and can be linked to delivery or access milestones.

Enable Deferred Payments

They help businesses to activate services immediately while collecting payments after a specified grace period. This is especially useful for enterprise onboarding, freemium-to-paid transitions, or Net 30/Net 60 deals for B2B clients.