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Setting Payment Terms for Your Invoice: A Comprehensive Guide

Updated: Aug 25, 2023

setting payment terms for your business

Every business is faced with the essential task of setting up payment terms. Whether it's a large enterprise or a small start-up, getting the payment terms right is crucial to maintaining cash flow, building healthy customer relationships, and ensuring business growth. This comprehensive guide will discuss setting payment terms for your business and provide samples to help you understand better.

The Importance of Payment Terms

Payment terms are conditions under which a seller will complete a sale, specifying when, how much, and by what means the buyer will pay. They determine the time frame within which the customer should pay for the goods or services they have received. These terms can vary from immediate payments on receipt of goods (like retail transactions) to extended periods of 30, 60, or even 90 days. Payment terms have a direct impact on a business's cash flow and must be clearly communicated and understood by both parties involved.

Setting Payment Terms: Key Considerations

When setting payment terms, it's crucial to consider several factors such as your business model, operating costs, industry standards, customer base, and market trends. Let's delve into each.

Business Model: A business providing bespoke products or services might require a deposit upfront, followed by staged payments as milestones are reached. On the other hand, a retail business may insist on immediate payment.

Operating Costs: A business with high overheads and fast-moving inventory might need quicker payments to cover its costs, while businesses with lower operating costs might be more flexible.

Consider your industry: Some industries have standard payment terms that have been set due to custom and practice over time. It's essential to know these standards and align your terms with them.

Industry standards:

  • Retail: Payment is typically immediate, collected at the point of sale.

  • Wholesale: Payment terms often range from Net 30 to Net 60 days.

  • Manufacturing: Varies greatly depending on the product, but commonly Net 30 to Net 60 days.

  • Agriculture: Typically immediate to 7 days, although terms can extend up to 30 days depending on the specific business agreements.

  • Construction: Often Net 30 to Net 90 days due to the nature of project-based work.

  • Services (e.g., consulting, legal, marketing): Typically Net 30 to Net 45 days, but can vary based on the agreement with the client.

  • Food Service and Hospitality: Typically immediate payment for customers; for B2B transactions, Net 30 days is common.

  • Transport and Logistics: Payment terms range from Net 15 to Net 45 days.

  • Healthcare: Terms can vary greatly, especially considering insurance-based payments, but for B2B transactions, Net 30 is quite common.

  • Technology and Software: For service agreements and subscriptions, payment is often demanded upfront; for B2B sales, Net 30 days is standard.

  • Customer Base: If you're dealing with larger corporate clients, longer payment terms might be the norm. Smaller businesses and individuals might expect shorter terms.

  • Market Trends: In some cases, economic conditions can influence payment terms. During a recession, businesses might extend payment terms to retain customers.

Samples of Payment Terms

Here are some samples of typical payment terms:

  1. Net 30: This is a common payment term indicating that the full amount of the invoice is due 30 days after the goods are shipped or the service is completed.

  2. 2/10 Net 30: This means the buyer can take a 2% discount if they pay within ten days. If they choose not to take the discount, the full invoice amount is due in 30 days.

  3. COD (Cash on Delivery): This term means that payment is due at the same time as the goods are delivered.

  4. Net EOM (End of Month): This term indicates that payment is due at the end of the month in which the invoice is received.

Making Payment Terms Clear

Clear, specific, and unambiguous payment terms are key to avoiding misunderstandings or disputes. Here are some tips:

  • Specify the Payment Method: Indicate whether you accept checks, bank transfers, credit card payments, or any other form of payment.

  • State When Payment is Due: For example, 'Payment due within 30 days from the invoice date.'

  • Late Payment Penalties: If you impose interest or penalties for late payments, this should be clearly stated.

  • Discounts: If you offer early payment discounts, include the details.

Here is a sample:

  1. Terms of Payment: All invoices are due for payment within 30 days of the invoice date, unless otherwise agreed in writing by both parties.

  2. Interest on Late Payments: Any amounts not paid by the due date shall bear interest at the rate of 1.5% per month, or the maximum rate allowed by law, whichever is less, calculated from the due date until paid.

  3. Payment Method: Payments should be made by bank transfer to the account specified on the invoice. Any charges or fees related to the transfer must be borne by the client.

  4. Disputes: If the client disputes any portion of an invoice, the client shall inform the provider within ten business days of the invoice date. The client shall pay the undisputed portion of the invoice as per the payment terms. Once the dispute is resolved, the client shall pay any remaining amounts within five business days.

  5. Collection Costs: In the event that the provider needs to engage a collection agency or attorney to collect overdue amounts, all reasonable costs, including attorney's fees, will be payable by the client.

  6. Right to Terminate: The provider reserves the right to terminate or suspend its service if payment is not received within 60 days of the invoice date.

  7. Currency: All payments shall be made in US Dollars unless otherwise agreed in writing by both parties.

Tip: Want to get paid faster? Ditch the jargon! Instead of using terms like Net 30, Net 60, or Net 90, which may not be understood by all, consider using plain language in your invoicing terms. Simply state, 'Payment is due within 30 days,' to make your expectations clear and avoid ending up on the "I'll check this later" pile. Clear, straightforward language can lead to quicker payments and improved cash flow.

To protect your business from the adverse effects of late payments, it's crucial to include penalties in your payment terms. When customers understand that there are consequences for late payments, they're often more motivated to pay on time.

Late Fees

Late payment fees act as a deterrent for customers who might otherwise delay their payments. They can either be a fixed charge that's applied as soon as the payment becomes overdue, or they can be an interest charge that accumulates over time. For instance, a 2% per month late fee would mean that for every month the invoice is overdue, an additional 2% of the outstanding amount is added to the invoice total.

Interest on Overdue Payments

You have the right to charge interest on overdue payments. This interest, known as statutory interest, can be charged at 8% plus the Bank of England base rate for business to business transactions. You cannot claim statutory interest if there's a different rate of interest in a contract.

If an account remains unpaid and you need to hire a collection agency or an attorney to recover the debt, you should also specify that the debtor will be responsible for these additional costs. It's important to state this clearly in your terms and conditions. A clause such as "In the event of non-payment, the customer will be responsible for all reasonable collection and legal fees" should be included.

Remember, it's essential to be aware of local and national laws that may limit the amount or types of late fees you can charge. It's always a good idea to consult with an attorney to make sure your payment terms are both fair and legally compliant.

By being proactive and establishing clear, comprehensive payment terms, you can encourage prompt payment, deter late payment, and ensure you're compensated for any additional costs incurred due to late payments. This approach not only helps protect your cash flow but also contributes to the sustainability and growth of your business.


Setting payment terms is an essential aspect of managing a successful business. It ensures a predictable cash flow and fosters healthy relationships with customers. By considering your business model, operating costs, industry standards, customer base, and market trends, you can establish payment terms that are beneficial to both your business and your customers. Remember, clear communication is key to effective payment terms, so make sure your terms are precise, unambiguous, and agreed upon upfront.

As you navigate the task of setting up payment terms for your business, refer to this guide to ensure you strike the right balance between your needs and those of your customers.

Q1: What are invoice payment terms and why are they important for businesses?

A1: Payment terms are conditions set by sellers specifying when, how much, and by what means buyers will pay. They're crucial for maintaining cash flow, fostering healthy customer relationships, and ensuring business growth.

Q2: What are key considerations when setting payment terms for an invoice?

A2: Key considerations include the business model, operating costs, industry standards, customer base, and market trends. These factors can greatly influence the payment terms, whether they're immediate, or extended over 30, 60, or even 90 days.

Q3: What are some common examples of payment terms?

A3: Examples include Net 30, where full payment is due 30 days after the goods or service is delivered; 2/10 Net 30, offering a 2% discount if payment is made within ten days; COD (Cash on Delivery); and Net EOM (End of Month).

Q4: How should businesses deal with late payments?

A4: Businesses can protect themselves from late payments by clearly stating in their payment terms the penalties for late payments, such as late payment fees, interest on overdue payments, and collection and attorney fees if the account remains unpaid.

Q5: What is the impact of late payments on a business?

A5: Late payments can lead to a cash flow crunch, affecting a business's ability to cover operational costs and invest in growth. They can also divert time and resources from strategic initiatives to chasing overdue invoices.


Disclaimer: Any and all information is not intended to be, nor is it, legal advice. Please consult your attorney for information concerning allowable rates of interest.

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