What are payment terms?
In the world of B2B, many transactions rely on trade credit, meaning that payment doesn’t happen immediately. The timing and nature of that payment is dictated by payment terms included on an invoice, which will specify:
- Due dates: When payment is expected, such as 14 or 30 days after the invoice date.
- Payment methods: Accepted forms such as bank transfer, credit card, or cash.
- Penalties: Consequences for late payments, including interest rates or fixed fees.
- Discounts: Incentives for early payments, which can foster goodwill and faster cash flow.
For instance, the common payment term “Net 30” means the buyer must pay within 30 days of the invoice date.
Payment terms aren’t there to be pushy – they’re there to be clear.
Not adding payment terms to your invoice leaves the time and nature of payment open-ended, which can mean long waits to get paid, and uncertainty for your customers. Transparent payment terms, on the other hand, reduce confusion and help businesses manage their finances effectively, ensuring a smoother experience for all parties involved.
Common payment terms: Net 30, 60, 90
Net terms refer to the time frame a buyer has to pay an invoice after it’s issued:
- Net 30: Payment due in 30 days.
- Net 60: Payment due in 60 days.
- Net 90: Payment due in 90 days.
Ideally, these terms balance flexibility for the buyer and predictability for the seller. For example, Net 30 is a widely adopted standard across industries, allowing businesses to maintain available cash flow while giving clients enough time to organise payments.
Invoice payment terms in the UK: 14 Days Standard
In the UK, the default payment term is typically 30 days. However, many small businesses opt for a shorter 14-day window to encourage faster payments and maintain more available cash flow. This is particularly handy for industries with tight margins or those requiring frequent stock replenishment, such as retail or hospitality.
Shorter terms can also reduce the risk of late payments, enabling businesses to meet their own financial obligations more efficiently. If you’re stepping outside of the standard 30-days, the key is communicating these expectations early and clearly in contracts and invoices.
The role of early payment discounts
You may see invoices with certain codes on them that specify discounts for early payments. This can be a way to balance the needs of buyers and sellers – generally buyers are keen for the longest payment terms possible, but offering a discount can be a win-win for both sides.
For example, a 2/10 Net 30 would mean that a 2% discount is applied if payment is made within 10 days, with the full amount due in 30 days.
This approach benefits both parties: the seller can speed up their cash flow and reduce the risk of late payments, while the buyer enjoys a saving on the full cost. This is a balancing act, however, and it’s important to calculate the impact of discounts carefully to ensure they align with your financial goals.
Late payment penalties on payment terms
Late payments are a common issue for sellers, with 17% of payments coming in late, disrupting operations and straining cash flow. While penalties in payment terms can motivate clients to pay on time. Common tactics include:
- Interest rates: For example, 1.5% per month on overdue balances.
- Fixed late fees: A set amount added to outstanding invoices.
In the UK, the Late Payment of Commercial Debts (Interest) Act 1998 empowers businesses to charge interest on overdue payments, providing legal recourse to protect cash flow.
Managing cash flow with payment terms
Payment terms have a big effect on your cash flow. Being too generous can expose you to long waits to get paid, or lead to bad debts from customers who can’t settle their bills. However, being too strict can also lead to missed sales from businesses who would otherwise be able to meet longer terms.
In general, the focus should be on aligning payment terms with your business cycle. For example, businesses with rapid turnover may benefit from shorter terms like Net 14.
Payment terms and outstanding payments also require attention to manage and control, communicating with clients and chasing unpaid invoices. For businesses working at scale, digital tools like iwocaPay can help you offer flexible payment options to clients while ensuring you still get paid upfront for each sale.
Industry standards and examples
Different industries have distinct payment term norms. Here are a few examples:
- Agriculture: Immediate to 3 days. Due to the perishable nature of products, prompt payment is urgent.
- Construction: 30 to 90 days. Here, longer payment terms are common, reflecting extended project timelines involved in complex projects.
- Professional Services: 14 to 75 days, though this varies based on the nature and duration of services provided.
- Retail: Immediate to 3 days, as quick payment cycles help maintain inventory turnover and cash flow.
- Transportation: 30 to 120 days – extended terms can arise in the case of complex logistics and billing processes
Understanding and adapting to these standards can make businesses more competitive and trustworthy within their sectors.
Technological integrations for payment terms
For businesses working with lots of customers, some of whom may be using different payment terms, integrating the right technology into payment processes can make the whole process significantly easier to manage.
- Automated invoicing systems: Cloud accounting tools like Xero or QuickBooks often have automated reminders and tracking for payment terms, ensuring consistent application of payment terms and catching issues early..
- iwocaPay: A platform that lets buyers spread costs over 3 to 12 months while suppliers receive immediate payment, reducing financial risks and improving cash flow.
Dispute resolution for payment terms
While clear payment terms ideally minimise disputes, occasional conflicts may still arise. To handle disputes effectively:
- Provide clear communication channels: Include a dispute contact on invoices to address client concerns promptly.
- Document agreements: Maintain records of all terms and discussions to ensure clarity in case of conflicts.
- Bring in mediation if needed: For unresolved issues, consider mediation or legal action as a last resort – the Government provides a service for claiming money for unpaid bills..
The majority of late payments are due to issues on the customer’s side that may be out of their control, such as being paid late themselves (40%) or economic conditions (29%) so working with them in an empathetic way can yield better – and more sustainable results – than immediate, aggressive action.
Offering the best payment terms without the risk
Flexible payment terms can be a game-changer for your business, building customer trust and boosting sales. However, the risks of delayed payments or cash flow issues often deter businesses from offering these benefits. With iwocaPay, you can eliminate these risks while still providing your clients with the payment flexibility they value.
How iwocaPay helps
iwocaPay is the leading choice for B2B buy-now-pay-later (BNPL), providing convenience and choice for buyers while protecting your business.
- Immediate payments: iwocaPay pays you in full upfront when your clients use their service.
- Flexible terms for clients: Clients can spread payments over 3 or 12 months, enhancing their purchasing power.
- Risk-free for you: iwocaPay manages approvals, credit checks, and collections, protecting your cash flow.
With iwocaPay, you can offer the best payment terms while staying financially secure. Empower your customers with flexibility and grow your business without worrying about late payments.
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FAQs about Payment Terms for Small Businesses
What are the 5 main payment terms?
The five main payment terms commonly used across industries include:
- Net 30, Net 60, Net 90: Payment due in 30, 60, or 90 days after the invoice date.
- Cash on Delivery (COD): Payment is due at the time of delivery.
- Payment in Advance (PIA): Payment is required before goods or services are provided.
- 2/10 Net 30: A 2% discount is offered if payment is made within 10 days; otherwise, the full amount is due in 30 days.
- End of Month (EOM): Payment is due at the end of the month when the invoice was issued.
Each term offers different advantages, depending on the cash flow needs of the business and the client’s financial circumstances.
How can I negotiate more favorable payment terms with suppliers?
To negotiate better payment terms with suppliers, start by preparing thoroughly and communicating clearly. Show your reliability by highlighting a strong history of on-time payments, which can build trust and strengthen your position. Request small changes initially, like extending payment terms from Net 30 to Net 45, to make adjustments more acceptable. Offer guarantees, such as setting up direct debit payments or committing to larger, regular orders, to reassure your supplier. Building a good relationship is essential, as it improves your chances of successful negotiations. Focus on finding terms that benefit both you and your supplier.
What legal protections exist in the UK against late payments?
In the UK, businesses are protected under the Late Payment of Commercial Debts (Interest) Act 1998. This legislation allows:
- Charging statutory interest (currently 8% plus the Bank of England base rate) on overdue payments.
- Adding compensation fees for debt recovery, ranging from £40 to £100 depending on the invoice amount.
- Issuing statutory demands for payments to prevent cash flow issues.
Ensuring clear terms in your contracts strengthens your legal position against late-paying clients.
How do payment terms affect my company’s cash flow?
Payment terms directly influence your company’s cash flow. Longer terms, such as Net 60, can delay income and put pressure on your working capital, while shorter terms, like Net 14, improve liquidity but might discourage some customers. It’s important to align payment terms with your business needs to strike a balance between maintaining healthy cash flow and fostering strong customer relationships.
What are the implications of offering early payment discounts?
Early payment discounts can be a double-edged sword:
Advantages:
- Accelerate cash flow.
- Reduce the risk of late payments.
- Strengthen customer relationships.
Disadvantages:
- Reduce overall revenue.
- Require careful calculation to ensure profitability.
Offering discounts like “2/10 Net 30” works well for businesses needing quick cash flow boosts, provided the margins allow it.
How can I assess a client’s creditworthiness before setting payment terms?
To assess a client’s creditworthiness before setting payment terms, start by running a credit check through services like Experian or Equifax to evaluate their financial stability. Request trade references to get insights from other businesses that have worked with the client, and review their payment history for any signs of delays. You can also begin with shorter payment terms, such as Net 14, as a trial before offering longer terms. A thorough credit assessment process helps protect your business from potential defaults.
What are the best practices for managing late payments?
Dealing with late payments can be challenging but manageable with these steps:
- Set clear penalties: Include late payment fees or interest in your terms.
- Automate reminders: Use invoicing software to send reminders as due dates approach.
- Follow up promptly: Contact clients immediately after a payment deadline passes.
- Negotiate: Offer payment plans for clients facing genuine financial difficulties.
- Escalate if needed: For unresolved cases, consider legal action or enlisting a debt recovery agency.
Consistency and proactive communication are key to minimising late payments.
