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What Are Payment Terms? (Everything You Need To Know)

What Are Payment Terms? (Everything You Need To Know)

As either a buyer or a seller, you have likely seen payment terms without realizing it. These are the specific conditions that concern a sale, specifically the payment.

Payment terms are usually specified by the seller and given to the buyer to agree to as part of the sales process. Receiving your payments on time and determining how the payment is made are critical details to ensure that the money comes in promptly. 

If a business wants to ensure that sales are done on their precise instructions then detailed payment terms should be included. In this guide, we will ask the question; what are payment terms? Here’s everything you need to know. 

What Are Payment Terms? (Everything You Need To Know)

For any sale, you should be looking to include payment terms to provide a buyer with clear and understandable details about how and when to pay for the goods or services.

These payment terms are typically included on an invoice and can even specify just how long a buyer has to confirm their payment once the sale has been initiated.

The payment terms could go into further detail to document any discounts to be included and late fees that would apply if payment was delayed. Further details can include how the buyer can make a payment and confirm any particular terms that were discussed as part of the sales process. 

What Should Be Included In Payment Terms

Payment terms can be really helpful to both a buyer and a seller. In that sense, it helps to have a clear understanding of what is expected from a sale and how business is to be conducted. That may mean several items are included in payment terms or just a couple which could depend on the relationship between the buyer and seller.

Early Payment Discount

This is an important payment term to include if you want to encourage a buyer to pay before a specified due date.

The item could be noted as ‘net 14 6/10’ which would mean that a buyer has 14 days to pay in full yet can get a 6% discount if the invoice is paid within ten days. However, after those ten days, the buyer cannot expect an early payment discount.

Net 7/14/30

An important payment term item specifies the number of days a buyer has to pay an invoice. The ‘net’ aspect relates to the total payable sum after discounts have been applied.

It is also important to use the number to avoid confusion as the end of the month could mean a different amount of days depending on which month. 

Payable On Receipt/Cash On Delivery

If an invoice states either ‘payable on receipt’ or ‘cash on delivery’, it means that the seller is determined to be paid once the goods or services have been received.

The ‘cash’ aspect of the term can also be a little confusing as it does not have to apply to a cash payment specifically. Rather, it is simply the payment that could be made by debit or credit card, a check, or even a wire transfer. 

Cash Next Delivery

An invoice can even specify the amount which is due on the next delivery. This is if a buyer receives several items or is expecting a series of them to be delivered.

Cash In Advance

Alternatively, ‘cash in advance’ means that a buyer has the option of paying for the specified items once they have returned the payment terms, typically on a form. 

Cash Before Shipment

If an invoice states ‘cash before shipment’, you can expect the specified amount to be paid before it has been shipped out for delivery. 

Recurring Payments

Recurring payments are those payments that occur regularly, such as every month or quarter. The payment is typically processed automatically and is the same amount each time.

That makes it a simple payment to conduct and should be specified in the payment terms. The recurring payments should be canceled once the business relationship between a buyer and a seller has ended.

The Importance Of Payment Terms

The payment terms can be a crucial aspect of a sale for the buyer and the seller as it sets expectations. That is why it is important to have an initial verbal understanding of when a business is expected to pay and what may occur if a payment arrives late.

As long as the information is clear, and the payment terms have been included in contracts and invoices, such transparency should help buyers and sellers conduct business. 

Payment terms are also important as they determine how a payment will be structured. For some businesses, sending payments in installments may be a far easier process than paying in full on a pre-determined date.

The terms should outline an arrangement for when installment payments will be made as that help balance out capital in terms of expenses. If a buyer and seller are comfortable with the payment terms then that can secure future business on less stressful terms. 

The Individuals That Confirm Payment Terms

Only certain individuals should be tasked with determining and confirming payment terms. That may not mean a sales team but a head of accounting or even the business owner in a smaller organization.

These individuals will set out the payment terms prior to any transactions being performed. The payment terms are a vital part of the relationship between a buyer and seller so should be entrusted to those individuals who can deliver instructions clearly and responsibly. 

Final Thoughts

Getting the payment terms right can be a process of trial and error yet it can be made easier. For new business relationships, an early conversation can help both parties understand which payment terms may apply and which do not need to be included.

On that basis, a good business relationship can be formed simply from payment terms that provide as much detail as necessary but do not get overbearing.

Without payment terms being included, there is the danger that payments can become lax as no conditions have been included. A business should be able to determine when it gets paid, how it gets paid, and whether there are any perks for paying early.

While business can be conducted without payment terms, it helps to have conditions written out so both parties know where they stand if something goes wrong. 

Frequently Asked Questions

What Is The Most Commonly Used Of All Payment Terms?

A lot of businesses will insist on being paid on time which will be set out in their payment terms. You can expect to find the payment term being 30 days, also known as Net 30.

This simply means that a payment is expected to be made within 30 days or a buyer can expect late fees. This payment term, and several others, should be made clear on an invoice so that a buyer is aware of it and complies accordingly. 

What Is A Good Way Of Ensuring That Businesses Are Aware Of Payment Terms?

When conducting a sale, the payment terms can be verbalized in person or over the phone. Once a sale has been initiated, the payment terms should be written out and included in the contract.

The specific payment terms should also be written on the initial invoice, and the subsequent invoices, to ensure that a business complies with the terms going forward.