Payment terms: What they are and how they can protect your business

When you're running a business, it's critical that payments owed to you are paid in a timely manner to keep your own bills paid and the lights on. Business owners, self-employed workers, and individuals tasked with managing an operation’s finances need to know how to craft invoices that lay out clear and concise payment terms.

Understanding common payment terms and how to use them in the invoicing process can encourage clients to pay properly and on time. The more you know about payment terms, the easier it will be for you to pick the right approach for your business's sales. 

Payment terms and invoicing are often more relevant for service-based businesses and those that sell goods at high prices. For instance, laying out strict payment terms in an invoice might be the best choice for a lawn care company that provides services on a schedule, but wouldn’t make sense for a coffee shop selling directly to its customers. 

• What are contract payment terms?
• How to use payment terms
• Types of payment terms
• Common invoice words and acronyms
• Example of payment terms on an invoice
• How to choose the best invoice terms and conditions
• How to control payment methods with payment terms
• FAQs: Payment terms

What are contract payment terms?

Payment terms are an agreement that sets your expectations and outlines how, when, and by what method your customers or clients provide payment to your business. Typically associated with invoice payments, transparent contract payment terms can make it easier for your customers to understand your billing process, including in instances of a late or missing payment. 

Why are payment terms important? 

Contract payment terms are important because knowing how much money is going to hit your account and when is essential to accurate cash flow projections. Accurate cash flow projections help you plan for taxes, keep your business running smoothly, manage business growth and monitor if you receive payments on time.

How to use payment terms

Payment terms are essential when negotiating a contract. An effective set of payment terms should benefit both parties by maximizing how quickly your clients pay and minimizing inconvenience for your customer. To maintain a healthy business, remember that your payment terms should match your business plans and align with your business’s typical sales lifecycle. Always include your payment terms on invoices.

When are payment terms created and updated?

Payment terms should be created prior to sending out an invoice and should be updated any time the payment structure changes. Always include payment terms on your invoices.

Whether you need bookkeeping help or have questions, as you navigate the invoicing process, you can connect with QuickBooks Live experts to get coached—or even offload some work.* Our experts work however you want to work.

Types of payment terms

Setting up an invoicing process with detailed payment terms is an essential part of business accounting. Payment terms make your payments a priority and set expectations for your customers, making client relationships feel more professional and productive. Once you have the payment terms nailed down, the next step is to think about how you could accept these different payment types, like partial payments or advanced payments. 

Prepayment

Advance billing can improve your cash flow and reduce the risk of losing money. For example, an event photography business may want to avoid the risk of cancellation by requiring full payment before the event takes place. Prepayment can be a major benefit for businesses—some companies even sweeten the deal by offering discounts to customers who do pay in full upfront.

Partial payment 

You may choose to require a partial payment of the total cost of a customer’s purchase. Often this can provide the working capital you may need to complete a customer’s project or benefit your business as well, in the form of increased sales and higher order value. They may also benefit your customers by breaking up their costs into smaller, more manageable chunks.

Installment agreements

You can also accept installment payments. Some companies base installment agreements on time—every three months, for example—or upon the completion of certain project milestones. You may choose to divide the customer’s total cost into a series of smaller monthly payments. Services like Afterpay now make this feasible for vendors where customers can buy something and pay it off over several months. 

Lines of credit

A line of credit offers buyers financing toward products and services; customers can then repay the balance on the agreed payment schedule. Offering a line of credit through your business can, however, come with some risk as the customer could default. While this option is typically more commonly used by larger organizations, small businesses can also use them.

Immediate payment

Immediate payment refers to a transaction for which payment is due upon receipt, or as soon as the goods or services are delivered. Some may add into the contract that you have the right to repossess goods if the customer does not provide immediate payment. However, immediate payment may not always be feasible or practical for certain types of businesses or transactions.

Net 7, 10, 15, 30, 60, or 90

These terms refer to the number of days in which a payment is due. For instance, net 30 means that a buyer must settle their account within 30 days of the date listed on the invoice. 

Choosing net payment terms may inconvenience you as a business owner, as you'll have finished the project or delivered the product without receiving income. However, customers may prefer these terms. Try to find a period that works for both you and your client.

Subscriptions and retainers

Subscription and retainer payment terms require customers to pay regularly, such as monthly or annually. Typically, businesses on retainer agreements issue invoices to clients on a recurring basis. Automating invoicing for recurring payments can help in these situations.

Common invoice words and acronyms 

Let’s review some of the most common acronyms that small business owners should be aware of when generating invoices: 

• CIA: Cash in advance
• CBS: Cash before shipment
• CND: Cash next delivery
• COD: Cash on delivery
• CWO: Cash with order
• EOM: End of month
• PIA: Payment in advance
• 1MD, 2MD: Monthly credit payment of a full month (or two-month) supply
• 21 MFI: 21st of the month following invoice date

Here are a few additional terms that might come up as you manage your company’s finances:

• Accumulation discounts: Discounts on large orders
• Contra: Payment from the client, offset by the cost of supplies purchased
• Forward dating: Invoicing for payment to be made after the customer receives the order
• Partial payment discount: When a seller offers a partial discount due to low cash flow
• Rebate: Refund sent to the buyer after they’ve made a purchase
• Stage payments: Set payments over a period of time, agreed upon by the client and seller

Common invoicing challenges

Invoicing isn’t as cut and dry as some may assume. There can be payment problems as well as management issues that arise. Common invoicing challenges include:

• Fielding disputes over payment terms
• Attempting to collect late or delinquent payments
• Managing payments and tracking invoices
• Keeping payments secure

Clear and legally binding payment terms can help mitigate these issues. If a customer fails to pay you under these terms, there are steps you can take to get your money. 

Example of payment terms on an invoice

To get a better idea of why payment terms are essential to your business’s finances, let’s take a look at an example invoice that shows several payment term elements. Invoices typically include the basics, such as business name, invoice amount, and accepted payment methods. There is also space for personalization, such as a logo and personal message.

How payment terms factor into the invoice process

A clear, professional invoice can help ensure you and your customers are on the same page once work is complete regarding payment terms. The typical invoice includes the following: 

• Invoice date
• Total invoice amount due
• Payment date 
• Acceptable payment time frame
• Late payment policy
• Stipulations for an advance or deposit
• Payment plan details
• Accepted payment methods

 Additional factors you may want to include on an an invoice are: 

• Invoice number: This will allow you and the customer to track invoices chronologically. 
• Dispute contact: You’ll also want to provide your contact information so the customer has a resource if any issues arise.

How to choose the best invoice terms and conditions

Choosing your business invoice terms can either offer a strong foundation to your business—or set it on unstable footing. There are a few considerations to ponder before setting your terms.

Look at cash flow

Are you constantly running low on cash toward the end of the month? Or having a hard time getting started at the beginning of the month due to lack of money? This could be a result of having a cash flow problem. The best invoice terms to consider are the ones that get money in your pocket as soon as possible. 

The following payment options could be a good fit:

• Pay in full upfront
• Pay 50% upfront
• Ask for installments, where the first is due at the time the order is placed

Save time assessing your cash flow with experts by your side. QuickBooks Online users already have access to verified experts who can support their whole business, from books to taxes. Get peace of mind and personalized expertise focused on your success with QuickBooks Live Assisted Bookkeeping*.

Take industry standards into account

Different industries have payment term norms that customers expect. Some quick research could give you greater insight into your industry’s standards. For example, it's common for a wedding vendor to request installments throughout the booking process. A hair salon, on the other hand, typically requires cash upon delivery.

Review client history 

The payment terms you offer may vary customer to customer. For instance, you might want to consider stricter terms—such as, upfront payments or cash on delivery—for clients whose payments are notoriously late or delinquent.

Conversely, if you work with a client who has a perfect track record, you might consider rewarding their timeliness with more lenient terms or even discounts in certain cases.

Late fees and interest terms 

Late fees and interest can be strong motivators to getting your invoices paid on time. Documenting your terms gives you legal standing in case your customer doesn’t pay on time. If you don’t receive prompt payment and your customer ignores your invoices past due, you may need to take legal action to recoup the funds. An invoice is typically not considered a legal document on its own, so if you don’t have a contract in place, you won’t have a strong legal standing. A contract is also the perfect place to outline any late fees you plan to impose. 

Before implementing any new payment terms, they must be made known to your clients. Here are some tips to go about it respectfully:

• Send an email update email to your client list—make sure pertinent dates and details are crystal clear. 
• Add the new policy to all your upcoming invoices in very plain sight (barring contract agreements around payment).
• Give a courtesy call to delinquent clients and remind them of their current balance as well as when and how the new terms will impact them.

Determine invoice size

Small businesses may undertake a large invoice for a sizable project. To remedy any risk introduced, it might be wise to ask for a deposit prior to starting. As a business owner in this situation it is important to assess the invoice size, analyze your cash flow and make a decision based on facts, not trust alone.

With QuickBooks Live you have access to trusted small business tech and verified expertise to support your whole business. Real experts with best-in-class tools to support you and your business changes and grows can streamline how you work by automating tedious tasks such as invoice formatting. 

How to control payment methods with payment terms

In addition to controlling the timing of your payment, you also have a say in how customers pay you. Setting expectations for your preferred payment methods in your invoice terms will help ensure you get paid appropriately and avoid confusion later on. It's best to make the process as convenient as possible for the customer. Two of the more modern payment methods you might want to consider are smart invoices and credit cards.

Smart invoices

Software like QuickBooks enables customers to pay online anytime with pay-enabled smart invoices. With smart invoices, customers can pay using credit cards, debit cards, and automated clearing house (ACH) bank transfers.

It is important that you create and send an invoice as soon as you complete an order or service. Delays can result in later payments or cash flow interruptions. You can set up automatic and recurring invoices to streamline this process, which can reduce the guesswork associated with invoicing. Alternatively, you can email invoices with a link for payment directly to the customer. QuickBooks Payments offers a free email and ACH payment merchant service account, and free instant deposits with a QuickBooks Money business bank account. 

Credit card or mobile payments

You might also accept credit card payments, for which you can request that the client provide you with a credit card number. Or you can accept mobile payments with the QuickBooks GoPayment app, which comes with the hardware necessary to accept all major credit and debit cards using just your mobile device.

Be aware, however, there are usually higher fees associated with credit card payments. Some business owners choose to pay the fees themselves, while others opt to pass them along to customers. If you choose the latter, you’ll want to indicate this in your contract. The contract should clearly explain that you’ll charge the customer a credit card fee if they elect this payment method.

Make security a priority

Securing invoice payments is also a concern worth noting. It’s entirely possible for fraudulent invoices to be sent in your name, causing significant financial losses for both you and your customer. QuickBooks Online updates automatically, ensuring your work product is protected and giving you peace of mind. 

*QuickBooks Live Bookkeeping requires QuickBooks Online subscription. Additional terms, conditions, limitations, and fees apply.

**Product Information:

QuickBooks Card Reader: Data access subject to cellular/internet provider network availability and occasional downtime due to system and server maintenance. Product registration and QuickBooks Payments account required. Terms, conditions, and features subject to change.

QuickBooks Payments: QuickBooks Payments account subject to eligibility criteria, credit, and application approval. Subscription to QuickBooks Online required. Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services.

QuickBooks Money is a standalone Intuit offering that includse QuickBooks Payments and QuickBooks Checking. Intuit accounts are subject to eligibility criteria, credit, and application approval. Baking services provided by the QuickBooks VisaⓇ Debit Card is issued by Green Dot Bank, Member FDIC, pursuant to license from Visa U.S.A., Inc. Visa is a registered trademark of Visa International Service Association. QuickBooks Checking Deposit Account Agreement Apples. Banking services and debit card opening are subject to identity verification and approval by Green Dot Bank. Money movement services ar eprovided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services.

For more information about Intuit Payments' money transmission licenses, please visit https://www.intuit.com/legal/licenses/payment-licenses/.