What Are Payment Terms on an Invoice and How do they Affect Your Cash Flow?

Every business wants to get paid on time, but that means making your expectations clear to your customers. Payment terms on invoices set the stage for when, how, and under what conditions your customers are expected to settle their debts. It’s an agreement between you and your buyers that governs your transactions – and that means they need to be clear, fair and practical.

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Common payment terms you need to know: Net 30, Net 60, EOM, PIA and more

Payment terms vary according to industry, client-types and transactions. It’s not uncommon for businesses to have different terms for different clients, according to the relationships and volumes involved. Key terms to be aware of include:

• Net 30/Net 60/Net 90: These terms specify that payment is due 30, 60, or 90 days after the invoice date. For example, “Net 30” means the full amount must be paid within 30 days.
• EOM (End of Month): Under these terms, the payment is due at the end of the month in which the invoice is issued, regardless of the exact invoice date.
• PIA (Payment in Advance): This term requires customers to pay before the goods or services are provided. This strict scenario can help secure cash flow, particularly in high-risk or new customer scenarios, where you don’t want to take the risk of a missed payment. 

Understanding these terms and how they work is an important step for managing your cash flow. The terms you use may need to vary with your customer needs and the conditions of your cash flow, with clear communication of any change. 

For example, businesses that operate with short operating cycles might lean towards Net 30 or even PIA to reduce the risk of late payments, while industries with longer project timelines might find Net 60 or Net 90 more manageable, or even a necessity to close deals.

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What are UK payment terms rules for maximum allowed time and charging late interest?

While businesses generally have the freedom to set their payment terms, there are certain conditions that are specified in law to smooth out ambiguities in the process and ensure fair dealing.

• Statutory payment period in the UK: Unless an alternative payment date is agreed, the law requires that customers pay within 30 days of receiving the invoice or the goods/services provided 
• Right to charge late payment interest: You are entitled to charge interest on overdue invoices if payment is not received by the due date, if desired.
• Documentation rules: Sellers must clearly state all late fees and interest charges on every invoice and within contractual agreements. This is especially important in the case of any disagreements, providing legal backing to prove customers were aware of their obligations.
• Statutory demands: In instances of prolonged non-payment, you can issue a statutory demand to formally request payment, which can be a precursor to more formal actions, like seeing a county court judgment for debt.

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How can offering discounts motivate customers to pay faster?

Payment terms aren’t always a stick to motivate clients – they can also be a carrot, offering incentives to help customers pay earlier.

One common tactic is using early payment discounts, which of course have their own terminology. For example, “2/10 Net 30” means that the customer can take a 2% discount if they pay within 10 days; otherwise, the full amount is due within 30 days.

The idea is to reward proactive customers with a meaningful benefit: they save a little money, and you get a boost to your liquidity. The key here is to balance the discount against your profit margins. Even a small discount, when offered at scale across many invoices, can add up to a significant incentive without severely impacting your bottom line.

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What happens if a customer doesn’t pay on time?

Trade credit is always a calculated risk. While giving customers more time to pay may increase your sales when compared to a strict PIA policy, there's always a chance that sometimes a customer won’t pay up. Research finds that almost half of UK invoices were paid late in 2023. If your customer doesn’t pay on time, you have: 

• Late payment fees: You can stipulate additional charges to be applied when payment is not received by the due date. This can work as a deterrent and a way to get back any administrative costs from chasing up overdue invoices.
• Interest charges: As mentioned earlier, you have the right to charge interest on overdue amounts to encourage on time payments.
• Credit impact and defaults: Sometimes late payments are a sign of severe financial issues with your customer. In severe cases, you may have to consider legal action or employ a debt recovery agency, which adds costs and friction.

While there are ways to force a payment from your customer, this heavy-handed approach should be a last resort. Common reasons for late payments include customers themselves being paid late (40%) or tough economic conditions (29%) – working with customers to find a mutually beneficial solution can be a better solution for maintaining long term relationships.

The risk of late payments is one of the reasons that many businesses use trade credit insurance as a protection against defaults.

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Which invoice terms best balance attracting customers with healthy cash flow?

There’s no one-size-fits-all when it comes to payment terms. The right choice will depend on your products and services, the needs of your customers and your own liquidity needs. The right choice should strike a balance between being competitive and safeguarding your cash flow. 

Here are some strategies to consider:

• Clear and consistent terms: Your invoice should clearly state the due date, acceptable payment methods, any early payment discounts, and the penalties for late payments. This should be agreed with the client in advance to ensure that they’re able to meet the terms. 
• Customised terms for different clients: You might adjust your terms based on a customer’s payment history. For reliable or long-term customers, offering more flexible terms could boost loyalty, while for riskier clients, stricter terms or upfront payments might be more appropriate.
• Using payment technology: If you’re looking to provide customers with the ability to pay on their terms, while safeguarding your cash flow, working with the right tools can help. A B2B Buy-Now-Pay-Later (BNPL) provider like iwocaPay ensures you get paid upfront, while clients can spread the cost over 3 to 12 months with B2B installment payments.

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Aligning payment methods and payment terms

Today, there are a wide range of ways for your customers to pay, each with their own advantages and disadvantages.

• Direct Debit: Ideal for recurring payments and large invoices, direct debit provides a secure, automated way to collect payments on the scheduled due date. Set and forget, you can reduce the risk of human error and work of tracking payments.
• Credit card: Business credit cards offer fast processing times and are widely accepted. However, it’s worth noting that they usually come with higher transaction fees. 
• Bank transfer: These are useful large transactions and are typically low-cost and reliable. The rise of open banking has made these more convenient and accessible.
• Digital wallets: With more customers, including in B2B, shopping on mobile, digital wallets can offer more speed and convenience, with the ability to pay in a couple of clicks without entering payment details.

The key is to align your payment methods with your overall cash flow strategy. For example, if you have limited invoice-chasing resources, an automated system like direct debit or iwocaPay can help you stay on top of payments with less day-to-day management.

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How to communicate payment terms on your invoices

Clear communication is the starting point of all good relationships, in business and beyond. When it comes to invoice terms, ambiguity can lead to disputes, delayed payments, and angry customers. Here are some best practices:

• Make it simple: Ensure that every invoice prominently displays payment terms, due dates, and any applicable discounts or fees. Use plain language to avoid confusion.
• Update proactively: If you need to change your payment terms, notify your customers well in advance. This gives them time to adjust and helps maintain trust.
• Reminder systems: Send automated reminders well before the due date. A friendly nudge can often be the difference between a delayed payment and a prompt one.
• Dedicated communication channels: Make it easy for customers to reach out with questions regarding their invoices so you can catch issues early.

These not only enable you to offer flexible payment options to your customers but also ensure that you receive your funds upfront, safeguarding your cash flow.

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Should I offer discounts for early payments, and how might this impact my profitability?

By incentivising customers to pay sooner, you can reduce the time gap between invoicing and receiving cash. However, it’s important to carefully analyse the cost of the discount versus the benefit of faster cash inflow.

A 2% discount under a “2/10 Net 30” term might seem minimal, but if it results in significantly reduced days sales outstanding (DSO), the benefit in terms of improved liquidity could far outweigh the cost. You need to calculate the overall impact on profitability and consider factors such as the volume of sales, typical invoice amounts, and the reliability of your customer payments.

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Making your payment terms on invoices work for you

The payment terms you put on your invoice are a key element of the deal you make with your customers, providing them the space they need to manage their cash flow while ensuring you’re paid within a reasonable period.

The challenge for many businesses during tricky times is to offer payment terms that can satisfy their clients’ needs for flexibility while keeping their own liquidity on track. When you need to get paid fast, but still want to help your clients pay on their terms, iwocaPay can help.

We help businesses find that perfect balance by offering simple BNPL (Buy Now, Pay Later) solutions that help you streamline your trade receivables and your cash flow. We make it easy to offer flexible terms to your customers while ensuring that you receive payments upfront. That means no stress chasing late payments, no waiting for late bills and no need to check credit before offering a trade credit account. 

• Instant funds: Get paid upfront every time, no waiting required.
• Provide customer choice: Offer your trade customers spending limits up to £30,000 with flexible, interest-free extended terms.
• Streamlined processes: We’ll handle payment collection and credit risk management, so you can focus on selling.
• Easy integration: Accept payments online and in-person without any fees, integrating effortlessly with your existing sales process.