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How Payment Terms Can Help You Get Paid on Time

Invoicing | 5 mins read

Getting paid for invoices on time is every business’s goal. But this doesn’t always happen. Without clear-cut, predefined rules to guide your customers, your business is more likely to face late, partial or infrequent payments. 

According to recent studies conducted by Atradius*, amongst all invoices sent to customers, the percentage receiving late payments was roughly 49% from the US, 40% from Europe, and 88% from Australia. Late payments directly affect your business’ income and mean that you may end up making late payments to your vendors, starting an endless cycle. 

PAYMENT TERMS

One simple way to avoid all these consequences is creating well-defined payment terms. Payment terms are guidelines for your customers to follow. They clearly state what you expect from customers, thereby preventing issues that might creep up later. This helps you get paid on time and saves you from the hassle of dealing with missed payments. Also, setting up payment terms with your customers means that you can expect when to get paid, which helps your business’ cash flow. 

In this article you will be guided through the basics of payment terms, how to pick ideal payment terms for your business, and tips for writing your own.

What are payment terms? 

Payment terms are specifications that you give your customer regarding a sale. Typically, these terms include the cost of their purchase, any advance you might require, their mode of payment, and most importantly, when your payment is due. One common type of payment terms is called Net D, where D refers to the number of days until your payment is due. Net D payment terms are used when you want your customers to know when you expect to be paid. Here are some other payment terms that are commonly used by businesses:

Payment terms Meaning
PIA Payment in advance
Net 7 Payment due 7 days after invoice date
Net 10 Payment due 10 days after invoice date
Net 30 Payment due 30 days after invoice date
Net 60 Payment due 60 days after invoice date
Net 90 Payment due 90 days after invoice date
EOM End of the month
21 MFI 21st of the month following invoice date
COD Cash on delivery
CWO Cash with order
CND Cash next delivery
CIA Cash in advance
Stage payment Payments in previously agreed-upon installments

What payment terms are ideal for a business?

There are no hard-and-fast rules when it comes to picking payment terms for your business. It entirely depends on what your business sells. Not all businesses can use the same payment terms, and different terms work for different businesses. Here are the payment terms that are often preferred by businesses in certain industries:

Best practices for payment terms

Before you write payment terms of your own, look into these best practices:

Tips on writing the perfect payment terms

You can customise your payment terms according to your business. These tips can help you enhance them for better results:

Almost every business shares the common headache of getting customers to pay on time — or in some cases to pay at all. Payment terms provide a solution by setting expectations and also reducing any confusion your customers may have. Try incorporating these tips and practices into your own payment terms to see better results!


Source: *Atradius, (2004).Atradius-Managing risk, enabling trade. [online] Available at: https://atradius.com.au/# [25 Jul. 2018].
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