15 Accounting Payment Terms and How to Use Them - businessnewsdaily.com (2023)

  • Receiving payments on time is important for any small business owner.
  • By setting up the proper payment terms with your customers, you’ll avoid overdue bills, poor cash flow, and financial stress.
  • Your understanding of common accounting payment terms and strategies can optimize your ability to receive fees in a timely manner.
  • This article is for small business owners who want to use better accounting practices to receive payments on time.

When you’re a small business owner, getting paid on time is a top priority. If you don’t set up the right payment terms with your customers, this can lead to late payments, poor cash flow and unnecessary stress in your business.

Fortunately, there are simple steps you can take to improve your billing methods. This article will look at 15 common accounting payment terms and how to use them in your business.

What are payment terms?

When you send your customers an invoice, the payment terms set the expectations regarding future payment. They let your customers know how you prefer to be paid, and when they need to pay you by.

The payment terms will also sometimes include the penalties for a missed or late payment. It’s important to set up transparent payment terms, so your customers know what to expect. The more straightforward these are, the easier it will be for your customers to pay you on time.

What do invoice payment terms include?

When you send a new invoice to a customer, it should include all the information they require to pay you accurately and on time. Here is an overview of the information you should include.

(Video) Chapter 5:The Expenditure Cycle Part 1: Purchases and Cash Disbursements Procedures

  • The invoice date: This is the date when you’re sending the invoice.
  • The due date: The due date is when you expect to receive payment on the invoice – many invoices include standard payment terms like Net 14 or Net 30. (You’ll learn more about those terms below.)
  • The invoice number: The invoice number allows your customers to keep track of all the invoices you send them.
  • How much the invoice is for: The invoice should clearly state how much the customer owes you.
  • The currency you want to be paid in: If you frequently work with international clients, you may want to specify the currency you want to be paid in.
  • The payment methods you accept: The invoice should include a list of acceptable payment methods. For instance, you might accept credit cards, online payments and ACH payments.
  • Other payment terms: Your invoice should include any other payment terms the customer needs to know. For instance, you’ll want to include early payment discounts or if you expect an upfront deposit.

Common payment terms

Payment terms are usually included on an invoice as an abbreviation. Here are some of the most common invoice payment terms you need to know.

  • 1MD: This denotes a payment credit for a full month’s supply.
  • PIA: This stands for “payment in advance,” meaning payment must be made in full before the goods or services will be delivered.
  • CIA: This stands for “cash in advance,” which means the full payment must be made in cash before the goods or services will be delivered.
  • Upon receipt: Payment is expected as soon as the client receives the invoice.
  • Net 7: Payment is due in seven days.
  • Net 21: Payment is due in 21 days.
  • Net 30: Payment is due in 30 days. You’ll also sometimes see Net 60, Net 90, etc.
  • EOM: Payment is due at the end of the month in which the invoice was received.
  • 15 MFI: Payment is due on the 15th of the month following the invoice date.
  • 2/10 Net 30: Payment is due in 30 days, but the customer can receive a 2% discount for payment within 10 days.
  • COD: This stands for “cash on delivery,” which means the goods or services must be paid for in cash at the time of the delivery.
  • CND: This stands for “cash next delivery,” which means the payment must be made before the next delivery. This payment term is usually reserved for recurring deliveries.
  • CBS: This stands for “cash before shipment,” which means the balance must be paid before the product is shipped to the customer.
  • CWO: This stands for “cash with order,” which means the customer needs to pay the invoice in full before the goods will be produced and shipped.
  • Accumulation discount: This is a discount given on a large order.

Importance of payment terms

Your small business’s cash flow depends on how quickly your customers pay you. Having clearly defined payment terms will make it easier to forecast cash flow, take on new projects, and invest in new opportunities.

If you are too lax on the payment terms or don’t follow up with customers who have outstanding balances, your business’s cash flow could suffer – something that causes 82% of small businesses to fail, according to a U.S. Bank study.

How to use payment terms

You can use payment terms to control how and when your customers pay you. These terms set the expectations on payment from the start, so you avoid any confusion down the road.

Here are a few tips on how to use payment terms to your advantage:

(Video) How To Create an LLC and Do Taxes RIGHT in 2021 [Common Mistakes] - Level Up [Ep. 14]

  • Ask for upfront payment. In some cases, you may want to ask for payment upfront. This can be a good choice for service providers who want to guarantee payment before they get started on the work.

  • Request a deposit. If it isn’t realistic to require a payment upfront, consider asking for a deposit. For instance, requesting a 50% deposit is a good option for larger projects.

  • Create monthly retainers. If you have clients you work with on an ongoing basis, you can set up a monthly retainer for them. This is a set payment amount you agree to every month.

  • Set the invoice terms. If you do work for clients on and off, you’ll need to decide on the invoice terms. For instance, you can set the invoice terms to be due upon receipt, or you could choose payment terms as long as Net 90. It all depends on what makes sense for you and your client.

How to set up effective payment terms

If you struggle to get your clients to pay their invoices on time, you may need to set up more effective payment terms. Here are seven tips for setting up better payment terms for your clients.

1. Use accounting software.

First, you can simplify your invoicing process and finances if you use accounting software. The right accounting software will allow you to send invoices more quickly and with fewer errors.

Plus, you’ll be able to track your upcoming payments, send automated late payment reminders and easily reconcile your account. And accounting software will ensure that your financial records stay organized and that you’re prepared for tax season.

15 Accounting Payment Terms and How to Use Them - businessnewsdaily.com (1)Tip: Are you interested in trying accounting software, but overwhelmed by all of the options available? Check out our 2022 best accounting software guide for small businesses or details on specific products, like our QuickBooks Online review.

2. Be upfront about your payment terms.

Before you start working with a new customer, make sure they understand and agree to your payment terms. Explain the terms verbally to your client and include a written description in the contract you send. This will help eliminate any misunderstandings about how much customers owe you and when payment is due.

(Video) Is Vladimir Putin Secretly The Richest Man In The World

3. Be polite.

Want an easy hack for getting your clients to pay you faster? Be polite when you invoice your clients, and include the words “please” and “thank you” somewhere on the invoice.

A study by FreshBooks found that invoices that include a “thank you” in the invoice terms get paid almost 90% faster. And 45% of those invoices get paid in seven days or less, while 12% get paid in 14 days or less. Using “please” has a similar result; these invoices get paid 88% faster.

4. Offer a variety of payment methods.

Have you ever tried to make a purchase at a store and discovered that the business only accepts cash payments? Think about how you felt when you realized this – were you frustrated and annoyed by the inconvenience?

That’s likely how your customers feel if you offer them limited payment options. If you want them to pay on time, make it as easy for them as possible. Offer various payment methods such as credit cards, debit cards, online payments, ACH or even cryptocurrency payments.

5. Set shorter payment terms.

One of the best ways to get your clients to pay sooner is to shorten the due date. It sounds obvious, but if you give your clients a long time to pay, they will usually take it.

(Video) How to Run a Business in New York #businessinnewyork #newyork

For many industries, Net 30 is considered the gold standard for payment due dates. That’s a good time frame, but if you have a client who regularly ignores your Net 30 due date, you might consider shortening it to Net 21 or Net 14.

6. Be flexible.

Obviously, you want your clients to pay you on time, but you do want to recognize that sometimes you’re working with another business, and that company may grapple with cash flow issues of their own. Some businesses simply cannot accommodate Net 14 or even Net 30 payment terms, and will appreciate more flexible conditions.

15 Accounting Payment Terms and How to Use Them - businessnewsdaily.com (2)Tip: If you have a client who regularly pays late, talk to them to find out what the holdup is without putting any unnecessary pressure on them. Try to come up with payment terms that work for everyone.

7. Offer a discount for early payment.

Think about offering an early-payment discount to your customers. For instance, your standard terms could be Net 30, but customers receive a 2% discount if they pay the invoice within seven days.

So, if you send your customer a $5,000 invoice, they’ll receive a $100 discount for paying the invoice early. These discounts add up over time, so many customers may take advantage of that.

(Video) 25 Great Jobs for People Who Love to Travel #jobsthatpayyoutotravel #how #make

Of course, this type of discount means you’ll accept less money on the invoice. But the improved cash flow may be worth it for your business.


What are payment terms in accounting? ›

Accounting payment terms are the payment rules imposed by suppliers on their customers. Payment terms are imposed to ensure that payments are received by suppliers within a reasonable period of time. Discount terms may be allowed in order to accelerate cash collections.

What are the billing and payment terms? ›

Invoice payment terms are the conditions that outline how, when, and by what method your customers or clients will provide payment to your business. They are an agreement that sets your expectations for payment, including when your client needs to pay you and the penalties for missing a payment.

What does Net 30 payment terms mean? ›

What does net 30 mean on an invoice? In the U.S., the term “net 30” is one of the most common payment terms. It refers to a payment period, meaning the customer has a 30-day length of time to pay the total amount of their invoice. Other common net terms include net 60 for 60 days and net 90 for 90 days.

What is a net 15 payment terms? ›

On an invoice, net 15 means that full payment is due in 15 days after the invoice date, at the very latest. Net 15 is part of a company's payment terms. Instead of asking a client to pay immediately after a product has been delivered or service performed, the vendor gives the client time to pay the invoice.

What are the five payment terms? ›

5 types of payment methods and terms. There are five major payment methods you will often see parties adopting in international trade. These are cash in advance, letter of credit, documentary collections, open account, and consignment.

What are 14 day payment terms? ›

This means that you need to pay invoices before your order progresses. The 14 day period is the maximum time you should take, but if you do wait until then, your order won't make any progress. We recommend using Bank Transfer or Debit Card payment by phone where practical to minimise delay.

What are the basic payment methods? ›

There are two basic systems of wage payment—time rate system and piece rate system. Both the systems have their merits and demerits. No system can be considered suitable for all times and under all circumstances.

How do you write payment terms on an invoice? ›

Optimal Payment Terms
  1. Net 7 – Payment due in 7 days from invoice date.
  2. Net 10 – Payment due in 10 days from invoice date.
  3. Net 30 – Payment due in 30 days from invoice date.
  4. Net 60 – Payment due in 60 days from invoice date.
  5. Net 90 – Payment due in 90 days from invoice date.
  6. COD – Cash on Delivery.
  7. CIA – Cash in Advance.

What are 3 different types of billing systems? ›

There are three main types of billing systems: Closed Medical Billing Systems. Open Medical Billing Systems. Isolated Medical Billing Systems.

What does the term 5/15 net 30 mean? ›

You can also change it up to whatever terms you'd like. For example, if you wanted to offer your client net 60 terms with a 5 percent discount if they pay within 15 days, you would write that out as “5/15 net 60.”

What is a 30 60 90 payment plan? ›

Net 30 means the invoice is due in 30 days. Net 60 terms mean the invoice is due in 60 days. Net 90 terms mean the invoice is due in 90 days.

What are 2% net 30 terms? ›

What is 2/10 net 30? 2/10 net 30 is a trade credit extended to the buyer from the seller. A buyer will receive a 2% discount on the net amount if they pay the invoice in full within the first ten days of the invoice date. Otherwise, the full invoice amount is due in 30 days without a discount.

What is the difference between net 15 and net 30? ›

The difference between the various Net D payment terms is simply how many days someone has to pay. For example, if the terms are Net 15, then the customer must pay within 15 days. If the terms are Net 30, then the customer has 30 days to pay and so on.

What does 15 days EOM mean? ›

“EOM” stands for End of the Month. This means that the invoice is due and payable 30 days after the end of the month in which the goods were delivered. For instance, if the goods were delivered on July 15, payment is due 30 days after the last day in July.

What do terms 1/15 N 30 mean? ›

1/15 Net 30: This means the customer receives a 1% discount if payment is received within 15 days. If the customer doesn't pay within 15 days, then the invoice is due in 30 days with no discount.

How many types of payment are there? ›

In 2021, you may be surprised to hear that there are over 200 types of payment methods! Since we offer 25+ payment methods, it's worth understanding the different ones available.

What is the most common payment method? ›

Although cash still comes out as one of the top payment methods, the report also notes that more than half of payments (57%) were made with payment cards, such as debit, credit, and prepaid.

Which three payment methods are the most common? ›

Debit cards have remained – just barely – the most popular payment method, followed by credit cards and cash.

What are 6 methods of payment? ›

Payment Options
  • Cash.
  • Checks.
  • Debit cards.
  • Credit cards.
  • Mobile payments.
  • Electronic bank transfers.
9 Oct 2022

What are net 7 payment terms? ›

"Net 7" is an accounting term that describes when your invoice will be paid. Your invoice will be paid 7 days after the last earnings date in your invoice.

What do payment terms 1/10 net 30 mean? ›

The 1%/10 net 30 calculation is a way of providing cash discounts on purchases. It means that if the bill is paid within 10 days, there is a 1% discount. Otherwise, the total amount is due within 30 days.

What is meant by the payment term 2/10 30 days net? ›

2/10 net 30 means that if the amount due is paid within 10 days, the customer will enjoy a 2% discount. Otherwise, the amount is due in full within 30 days.

Does net 15 mean business days? ›

Net 15 is a term in an invoice that means the early payment of the product or service rendered is due in 15 days, at the latest. Net 15 payment terms is a business term for payment.

What is the process of payment system? ›

A code is sent to the payment processor once the transaction is verified by the card-issuing bank, which then transmits that code to the payment gateway. The merchant and customer receive a payment completed message on the card reader. The whole process only takes a few seconds.

What are some examples of terms and conditions? ›

Terms and conditions may include:
  • Intellectual property rights.
  • Termination clauses.
  • Governing law clause.
  • DMCA notice clause.
  • Limitation of liability.
  • Enforceability clause.
  • Arbitration clause.
  • Confidentiality clause.

How do you discuss payments with a client? ›

Asking for payment from clients over the phone
  1. Make sure you're talking to the right person.
  2. Introduce yourself.
  3. Have a good idea of what you want.
  4. Get straight to the point.
  5. Speak calmly and clearly.
  6. Do not let the emotions get the better of you.
  7. Summarize everything at the end of the call.
28 Sept 2021

Which payment terms are best? ›

Top 10 Payment and Invoicing Terms You Should Know
  • Payment at the time of service. ...
  • Due upon receipt. ...
  • Deposit required. ...
  • Recurring. ...
  • 50% deposit required. ...
  • Cash on delivery (COD) ...
  • Invoice factoring. ...
  • Some suggestions for using payment terms.
18 May 2022

How are terms of payment calculated? ›

Calculate the difference between the payment date for those taking the early payment discount, and the date when payment is normally due, and divide it into 360 days. For example, under 2/10 net 30 terms, you would divide 20 days into 360, to arrive at 18.

What are the two types of invoicing? ›

Different types of invoices explained
  • Proforma invoice. Sent before any work is carried out, these documents list out the goods and services being provided along with the price. ...
  • Interim invoice. ...
  • Recurring invoice. ...
  • Final invoice. ...
  • Collective invoice. ...
  • Credit invoice. ...
  • Debit invoice. ...
  • Account statement.

How many types of invoicing are there? ›

There are 9 main types of invoices for small business: Pro-forma invoice. Interim invoice. Final invoice.

What do terms 3/15 n 60 mean? ›

Example: terms 3/15, n/60 means a buyer will receive a 3% cash discount if paid within 15 days of the invoice date, and the buyer has a maximum of 60 days to pay the entire debt amount.

What does the term 3/15 n 30 mean? ›

Credit terms:

3/15, n/30. means you get a 3% purchase discount if payment is made within 15 days. or the net (full) amount is due in 30 days. n/eom. means that the net amount is due at the end of the month.

What does the payment term 2/15 net 60 mean? ›

The credit term of 2/15, net 60 signifies that the credit period for full payment is 60 days and the customer will get a trade discount of 2% on the full amount if payment is made within 15 days.

What are 50/50 payment terms? ›

A business owner may specify a "50/50" term, which means that a 50% deposit is payable on receipt of an order, and the balance is due on the customer's receipt of the product or service ("50% deposit, balance on delivery").

What does net 45 payment terms mean? ›

Net 45 is a payment term used to state that an invoice must be paid within 45 days of receiving it. Sometimes, a vendor may offer early payment discount terms for paying sooner. An example is 1/10 net 45, meaning the customer pays the invoice within 10 days instead of 45 to earn a 1% discount.

What is a 40 60 payment plan? ›

For example, if you have a 60:40 payment plan, you will be paying 60% in instalments until handover and the rest 40% on handover of the property. This kind of payment plan can often be seen in the following ratios: 10:90, 20:80, 40:60, 50:50, 60:40, 70:30, 25:75, etc.

What are net 10 terms? ›

"Net 10" means that payment is due 10 days from the date of the invoice. The most common terms for credit sales are net 10, net 30 and net 60.

What do terms 2/10 N 30 mean? ›

2/10 net 30 means that if the amount due is paid within 10 days, the customer will enjoy a 2% discount. Otherwise, the amount is due in full within 30 days.

What are net 3 payment terms? ›

A net 3/10 30 or 3/10 net 30 is an early payment discount of 3% if your customer pays within the first 10 days of receiving the invoice. The “3” is the percent discount, and the “10” is the number of days the discount applies for.

What are the 3 modes of payment? ›

Payment Options
  • Cash.
  • Checks.
  • Debit cards.
  • Credit cards.
  • Mobile payments.
  • Electronic bank transfers.

What are payment terms for a company? ›

Payment terms provide clear details about the expected payment on a sale. Often, payment terms are included on an invoice and specify how much time the buyer has to make payment on the purchase.

What are the three payment types? ›

Payment methods refer to the ways your customers can buy your product or service. When you purchase something at a shop, you can usually decide to pay by cash, card or mobile phone.

How many different payment types are used? ›

And under each method (say, credit cards), you have a host of options (Visa, Mastercard, and American Express, to name a few). In fact, there are more than 200 alternative payment methods worldwide.

How do you maintain payment terms? ›

Define Terms of Payment

The conditions define the due date of the invoice and the discount offered for the payment of the invoice within the predefined time period. In other words, the Terms of Payment determine the due date of the invoice and calculate the discount applicable on the invoices.


1. The power of building your network: Connect to More for Women Entrepreneurs Speaker Series
(Wells Fargo)
2. S2 EP10 - Small Business Ideas for Beginners in 2021 #WealthDemystified
(David Adefeso)
3. The Art of Interviewing
(Fairfax County Government)
4. Steps To Collect Court Judgment Debt Assets
(Private Investigator Videos)
5. Business Model Canvas | SBEP Startup Class
6. Adjusting your business plan during the crisis.
(Co-op Bank Kenya)
Top Articles
Latest Posts
Article information

Author: Kieth Sipes

Last Updated: 11/17/2022

Views: 6055

Rating: 4.7 / 5 (67 voted)

Reviews: 90% of readers found this page helpful

Author information

Name: Kieth Sipes

Birthday: 2001-04-14

Address: Suite 492 62479 Champlin Loop, South Catrice, MS 57271

Phone: +9663362133320

Job: District Sales Analyst

Hobby: Digital arts, Dance, Ghost hunting, Worldbuilding, Kayaking, Table tennis, 3D printing

Introduction: My name is Kieth Sipes, I am a zany, rich, courageous, powerful, faithful, jolly, excited person who loves writing and wants to share my knowledge and understanding with you.