Invoice Payment Terms
Invoice payment terms are the conditions agreed upon by the seller (the invoicer) and the buyer regarding when payment should be made for goods or services sold. They dictate the period that the buyer has to pay what they owe.
Here are some common types of invoice payment terms:
- Net 30, Net 60, Net 90, etc.: The “net” term means that the full invoice amount is due within that number of days after the invoice date or goods/service delivery. For instance, “Net 30” means the payment is due within 30 days.
- Immediate Payment or Due Upon Receipt: Payment is due as soon as the buyer receives the invoice.
- 2/10, Net 30: This term offers a discount for early payment. In this example, the buyer would receive a 2% discount if they pay within 10 days. If they choose not to take this discount, the full amount is due in 30 days.
- COD (Cash on Delivery) or COP (Cash on Pickup): Payment should be made when the goods are delivered or picked up.
- EOM (End of Month): Payment is due at the end of the month in which the invoice was received.
- Installments: Payment is made in portions over a period, such as monthly or quarterly.
- Line of Credit Pay: Payment is made as per the agreed-upon credit terms between the buyer and seller.
Setting clear payment terms is important for businesses as it allows them to manage cash flow more effectively, minimizes the risk of late payments, and sets clear expectations for the buyer. The specific terms a business chooses to offer can depend on a variety of factors, including industry norms, the business’s cash flow needs, and the relationship with the customer.
Example of Invoice Payment Terms
ABC Enterprises, that sells industrial equipment. You have just made a sale to another company, XYZ Ltd. After the goods are delivered, you issue an invoice to XYZ Ltd. with the following details:
- Invoice Date: July 7, 2023
- Goods: 10 Industrial Pumps
- Total Amount Due: $10,000
- Payment Terms: 2/10, Net 30
The “2/10, Net 30” payment terms mean that XYZ Ltd. has 30 days from the invoice date (until August 6, 2023) to pay the full invoice amount of $10,000.
However, if XYZ Ltd. chooses to pay within 10 days of the invoice date (by July 17, 2023), they can avail of a 2% discount. That means they would only need to pay $9,800 ($10,000 less 2%) if they pay early.
If XYZ Ltd. does not pay within the 10-day discount period, they owe the full $10,000, which is due no later than 30 days from the invoice date.
This payment term is beneficial to you as it encourages the buyer to pay sooner, thereby improving your business’s cash flow. On the other hand, it also provides flexibility to the buyer to manage their own cash flow.
