What are payment terms and how to use them

17 min read
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Payment terms (or ‘invoice terms’) lay out how and when you expect to be paid for your services or products.

If you run a small business or are a self-employed freelancer, cash can be tight - so ensuring timely payments is essential. When done right, payment terms can go a long way in securing up your cash flow, especially when combined with the best practices for sending invoices.

Let’s review commonly used payment terms and how invoice payment terms can protect your small business.


  • What are invoice payment terms?

  • Payment terms terminology

  • Why are payment terms important?

  • How to use payment terms

  • Controlling payment methods with payment terms

  • Tips for establishing effective terms

  • Common payment term challenges for small businesses

What are invoice payment terms?

Payment terms (sometimes called ‘invoice payment terms’) define how, when, and by what method you expect your customers to pay your business.

Payment terms are typically associated with invoicing and are often included in contracts. By agreeing on payment terms with your clients, you set expectations for repayment and any penalties for missing a payment, such as late payment fees. They help to ensure you get paid and in the way that works best for your business.

What’s included in payment terms?

Every business will have a set of payment terms that works for them. However, there are some common components that are often included in payment terms on an invoice: 

  • The payment date and period of time that your client has to pay the total amount owed

  • Stipulations for an advance or deposit

  • Payment plan details

  • A list of accepted payment methods

  • Late fee details (these should also be laid out in the contract)

  • Contact information

Not all of these elements are essential, but the more transparent you are about your payment expectations, the more likely your customers are to meet them.

The invoice itself will also contain elements such as invoice number, date and amount. Unless a VAT registered business, the invoice number isn’t always vital, but they can help you keep track of your invoices, as well as the customer. If you use invoicing software, tracking elements like these are often added as standard.

Invoices with payment terms outline when your organisation will receive income, helping with cash flow forecasting. They can also help you to get paid on time and, should things ever escalate, payment terms could help you to get your money back in claims court.

Where do I add payment terms on an invoice?

You can add payment terms in various parts of an invoice, depending on what you’re looking to include. For example, the issue date could go at the top of the invoice and accepted payment methods could be outlined just below the invoice amount.

There’s no specific right answer as to where to include the information. The key is to make sure the invoice is clear and understandable.

It can be a good idea to use invoicing software to generate an invoice template for you that you can then customise. This can save you time and stress worrying about what it should look like!

Including payment terms in your contract with a client is also a good idea. This is often best set up in a separate section to other terms to make it really clear to the client what they’re agreeing to. Remember: you should always consult a professional for legal advice and recommendations.

Payment terms terminology

Before we dive deeper into how to use invoice terms, let’s review some of the most common payment terminology that small business owners should keep in mind when generating invoices:

  • PIA: Payment in advance

  • Net 7, 10, 15, 30, 60, or 90: Payment expected within 7, 10, 15, 30, 60, or 90 days after the invoice date

  • EOM: End of month

  • 21 MFI: 21st of the month following invoice date

  • COD: Cash on delivery

  • CND: Cash next delivery

  • CBS: Cash before shipment

  • CIA: Cash in advance

  • CWO: Cash with order

  • 1MD, 2MD: Monthly credit payment of a full month (or two-month) supply

  • Stage payments: Set payments over a period of time, agreed upon by the client and seller

  • Forward dating: Invoicing for payment to be made after the customer receives the order

  • Accumulation discounts: Discounts on large orders

  • 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

  • Contra: Payment from the client, offset by the cost of supplies purchased

Having a good knowledge of common terminology and abbreviations will help you write effective payment terms, as well as understanding the payment terms of your own suppliers.

Why are payment terms important?

Payment terms are important because they help  you know when and how much money is expected to come into your business. It also helps you manage when money needs to leave your business, as per supplier invoice terms. You can then use this information in cash flow forecasting and budgeting as a small business

They are also important for helping ensure invoices are paid on time and are essential if you want to charge late payment fees. It means that you and your customer shouldn’t have any surprises.

Research by QuickBooks found:

  • 80% of small business owners stress about their company’s cash flow.

  • More than half of small business owners with cash flow problems say late customer payments are the primary cause.

  • 62% of small business owners don’t know exactly how much money they receive each month.

  • 58% of small business owners say they’ve made a poor business decision because they were worried about cash flow.

Accurate cash flow projections help you plan for taxes, keep your business running smoothly, and manage its growth - all of which is assisted by  payment terms.

Example of payment terms in action

To get a better idea of why payment or invoice terms are essential to your business’s finances, let’s take a look at an example.

Imagine you’re about to open a new shop front. You need to purchase £5,000 in equipment in order to run business from your new location. 

You recently received a large order from a customer and sent them an invoice for £7,000. You estimate that the customer will pay the invoice by the end of the month, giving you time to buy your new equipment and get the shop running. However, you haven’t laid out payment terms within the invoice.

The customer doesn’t pay by the end of the month. As a result, you can’t purchase the new equipment you need and are paying rent on the location, without being able to generate business from it. You begin to lose money as a result.

By adding more detailed payment terms to the invoice, your expectations on the date of repayment would have been understood by the customer. They’re much more likely to pay on time. It means you’re not going to lose money and you can effectively plan your business, making intelligent investments.

How to use payment terms

We’ve outlined what payment terms are, why they’re important and what’s often included, but how do you use payment terms to the best effect?

The key is to choose the right payment term for your business.

Payment terms should maximise how quickly your clients pay you and minimise inconvenience for your customer.

The goal of payment terms is to maximise how quickly your clients pay you and minimise inconvenience for your customer. A good set of payment terms should benefit both parties. Keeping this in mind helps you to use payment terms to their best effect.

Selecting appropriate payment terms is an important step toward building and maintaining a healthy business. Always include your payment terms on your invoices, but discuss them with your clients first and include them in your contracts.

You should also remember that payment terms should match your business goals. As your business develops, you might need to revisit your payment terms to ensure they still match what you want from your customers. 

Here are some ideas on ways that you could utilise payment terms to benefit your business cash flow.


Prepayment asks your customers or clients to pay in advance of the work - also known as advance payments.

It can improve your cash flow and reduce the risk of losing money as you only begin work once you have been paid. 

If you have an event photography business, for instance, you may want to avoid running the risk of cancellation. By asking clients to pay all their bill upfront - even if this is still in instalments - it means the customer is unlikely to cancel. Some businesses offer discounts to customers who pay in full upfront.

You might want to also look at your refund policy carefully if you ask for prepayments. It’s not a foolproof way of preventing cancellations, so you’ll want to be clear with your customers what is still expected (in terms of non-refundables) if they cancel.

Deposit upfront

You may choose to ask for a deposit upfront, then for the customer to complete payment when they receive the goods or service. This can be a good compromise if your customer is unwilling the pay the full amount upfront - as both parties take on equal risk.

Like with prepayments, deposits can help reduce the risk of cancellations. They can also provide partial capital useful for buying materials for the work. This can help with your cash flow and minimise the risk of being left out of pocket should the customer back out.

The customer can also benefit from a partial upfront payment as it allows them to pay in smaller amounts. This can mean the customer can afford a bigger project or to spend more with your business, leading to higher order values.

The amount you ask as a deposit should depend on your business needs. For example, 50% might be a reasonable requirement for some services. Or you might choose 25% or even 75%.

Some businesses will specify deposits are non-refundable, so consider whether this would be a good decision for your business. It tends to be a particular benefit if the work the customer is asking for requires you to buy specialist materials. 

For example, if you’re an artist, you might need to buy large quantities of paint for a specific project a client has commissioned. If the client were to then pull out, but you had charged a non-refundable deposit, you wouldn't be out of pocket for the materials.

If you choose to use a deposit system, be sure to lay out clearly when you expect the remaining payment to be made.

Instalment agreements

You can also choose to accept partial payments through payment plans that break your customer’s payments into smaller instalments. This can be beneficial for ensuring a steady cash flow if you have more or less work at different times of the month or year. It can also be beneficial to the customer and can lead to increased order values as they can afford a bigger spend overall.

As an example, you may choose to divide the customer’s total cost into a series of smaller monthly payments. Instalment agreements are similar to line-of-credit payment terms, except they’re cash-based.

Some companies split up big projects into milestones, and the customer pays upon each milestone. You may base instalment agreements on time — every three months, for example — or upon delivering a specific part of the project.

Lines of credit

Line-of-credit payment terms offer buyers credit toward the products and services they purchase. Customers can then repay the balance on the agreed payment schedule. Offering credit through your business comes with some risks, as the customer could default. Larger organisations typically use this type of customer financing as they have the financial stability to support the potential risk.

Immediate payment (payment due upon receipt)

Immediate payment refers to a transaction for which payment is due as soon as you deliver goods or services.

Examples of immediate payment terms include “cash on delivery” (COD) or “payable upon receipt.” You may negotiate into the contract that you can repossess goods if the customer does not provide immediate payment.

Being paid after providing the goods or service is known as being paid in arrears.

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 days (or N/30) means that a buyer must settle their account within 30 days of the date listed on the invoice. Using Net 30 terms, if you date your invoice March 9, clients are responsible for submitting payment before April 8.

Choosing net payment terms may inconvenience you as a business owner, as you’ll have expensed the entire project without receiving income. However, customers may prefer these terms which could lead to more sales. 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. This works well for any business in which you deliver regular goods or services.

Typically, businesses on retainer agreements issue invoices to clients on a recurring basis. Some businesses that use this payment term, use it in conjunction with 6 or 12 month contracts so you can ensure cash flow for a certain period of time, but this doesn’t work for every business.

Automating recurring invoice payments can help so be sure to look into invoicing software to help with this.

Early payment benefits

You can provide customers with an incentive to pay early. For example, consider offering a 5% discount if the customer pays the total balance in full before the due date. 

Early payments are a win-win. Customers receive a discount on your goods or services, and you’ll have enough capital to complete the project.

Controlling payment methods with payment terms

In addition to controlling the timing of your payment, you also have a say over how customers pay you by setting payment terms.

Include your payment options in your invoice terms. Setting expectations for your preferred payment methods will help ensure you get paid and avoid confusion later on.

The simplest way to define your payment policies is to make the process as convenient as possible for the customer. For instance, you may be accustomed to receiving paper checks or cash. However, expanding your accepted payment methods to bank transfers or card payments will increase the likelihood of on-time payments - especially as more people are moving to online banking and fewer have cash or cheque books. 

Two of the more modern payment methods you’ll want to consider are smart invoices and credit card payments. You could also consider using paypal to streamline your payments.

Smart invoices

Software like QuickBooks enables customers to pay online anytime with pay-enabled smart invoices

Smart invoices are digital invoices that allow customers to pay using credit cards, debit cards, and bank transfers - usually by including a payment link.

You can also set up automatic and recurring payments, which can reduce the guesswork associated with invoicing. If you don’t set up recurring payments, you can email invoices to the customer directly with a link for payment. These features are useful if you have ongoing contracts, but they can also make payment for any customer even easier - therefore improving the likelihood of you receiving payment on time.

Credit card payments

You might also accept credit card payments as another way to make it easier for your customer to pay you.

There are 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 to pass the fee onto your customer, 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.

Tips for establishing effective payment terms

Once you’ve decided what payment terms are most suitable for your business, it’s important to lay them out clearly and establish them with your customers.

1. Define your terms in a contract

It’s crucial to negotiate your payment terms with your customer before you begin work. Work together to determine the right approach for both sides as this will reduce the risk of the client not paying. Once you come to a consensus, outline your terms in your contract.

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 not a legal document on its own, so if you don’t have a contract in place, you won’t have any legal standing.

A contract is also the perfect place to outline any late fees you plan to impose. Will there be EOM fees? How about penalties or fees for nonpayments? A payment agreement contract serves to protect both of you, so it’s in your best interest to be thorough.

2. Include payment terms in your invoice

As well as in the contract, you should also include the key payment term information in your invoice.

This maximises the customer’s understanding of what’s expected, reducing the likelihood of problems.

3. Invoice promptly for on-time payments

Create and send an invoice as soon as you complete an order or service. Delays can result in later payments or cash flow interruptions. Cash flow is the underlying financial infrastructure for your company’s operations. Receiving prompt payment from customers allows you to focus on your day-to-day business functions and growth.

Common payment term challenges for small businesses

Establishing invoice payment terms is critical to protecting your business financially, but setting up this infrastructure comes with its fair share of challenges. This can especially be the case for small businesses where finances can be a lot tighter.

Let’s take a look at some of the hiccups that can arise with invoice terms and how you can avoid them.

Payment security

Although online payments are practically the norm for any shopping experience, not all payment platforms are trustworthy. On top of earning client trust with quality products and services, it’s just as important to make sure transactions are secure.

This can be avoided by doing your research and using trusted payment platforms. You should also ensure your website (if you sell online) is set up securely, for example, with a TLS certificate.

Managing payments and tracking invoices

Depending on your business’s size and structure, you may find it difficult to manage payments and allocate funds to the appropriate divisions within your organisation. This can especially be the case if you’ve grown particularly quickly and don’t yet have the right systems in place.

The fix? Build an invoicing system with clear payment terms and streamlined workflows. You should take the time to check your cash flow and income vs expenses regularly so you understand what money you have available and therefore, where you want to invest it.

An up-to-date business plan can be helpful for understanding in what areas you want your business to grow and therefore how to make it happen.

Unpaid invoices

Unpaid invoices are, unfortunately, a common occurrence for small businesses. 

Setting up detailed payment terms and guidelines for late payment go a long way in preventing unpaid invoices. However, it can also be worth having a basic understanding of the law and escalation routes - even if you never have to use them!

QuickBooks makes it easy to invoice your customers, accept payments, and automate follow-up reminders, so nothing slips through the cracks.

Key takeaways

Setting up an invoicing process with detailed payment terms is an essential step to business accounting. Payment terms make your payments a priority and set expectations for your customers, making client relationships feel more professional and productive.

With QuickBooks Online, you can easily connect with clients, set up payment terms, and collect accounts receivable.

Starting your own business in UK

We hope you’ve found this article about payment terms helpful. If you need more help in the process of starting your own business, our latest questionnaire can provide you with a personalised to do list to ensure you don’t miss out on any crucial steps. Complete the questions honestly to see exactly where you’re at.


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