What are invoice payment terms and how to set them for your business

Think of an invoice as a confirmation that a service has been performed or a product was shipped. Their main purpose, however, is to get businesses paid.

No matter what kind of company you run, there are a few details that invoices should always include, such as:

• Company name and address
• Client or customer information
• Invoice number
• Invoice date
• Product or service provided
• Payment terms

What are invoice payment terms?

It's important your customers know the details of what they bought from you—amounts, dates, accepted payment methods, descriptions, and quantities—but just as important is laying out the rules for customers to pay you. An invoice is a legal document that provides proof of sale. Without any payment terms, how would a third party (think a lawyer, judge, or arbitrator) determine if a customer is behind on payment?

Read on to learn more about invoice payment terms, the most popular types of payment terms, and how to choose the best ones to serve your business.

Standard payment terms

You can invoice your customers all day but if they're not paying you, you're not going to stay in business very long. That's where standard payment terms come into play.

You can have different standard payment terms depending on the industry you’re in and the customer you’re billing. However, your payment terms on any single invoice should always be clear, understandable, and consistent.

You should agree to the terms in advance (when you take the order or sign the contract), and your invoice should reflect that.

Types of payment terms include:

• Net 30
• 2/10 Net 30
• End of Month (EOM)
• 15 MFI
• Upon Receipt

Popular small business invoice payment terms

Choosing the right invoice payment term for your business is a personal decision that depends on various factors, from what industry you’re in to whether or not you’re short on cash.

Net 30 is generally one of the most common invoice payment terms. But that doesn’t mean you can’t establish something different for your business, especially if you find yourself looking for tips to address a cash flow crunch.

For example, 2/10 Net 30 is another type of popular business invoice payment term, giving your customers a choice to pay early and receive a minor discount.

Net 30: Net 30 is one of the most common invoice payment terms, in which payment is due in 30 calendar days from the invoice date. However, it is not uncommon for larger customers to try to negotiate Net 45 or Net 60 terms to offer them extended time to pay.

2/10 Net 30: When you give customers a 2/10 Net 30 payment term, you're telling your customer that although the invoice is due in 30 days, you'll give them a 2% early-payment discount if it's paid in 10 days. If you need to increase your cash flow, giving this incentive for early payment can be a big help. 1/10 or 3/10 means the same thing, except the discount is 1% and 3%, respectively.

End of the Month (EOM): EOM means payment is due at the end of the calendar month. This is a less common invoice payment term and typically applies to businesses that send recurring, monthly invoices.

15 MFI: Another less common term, 15 MFI translates to payment being due by the 15th of the month following the invoice date.

Upon Receipt: When an invoice is due upon receipt, it means payment is due as soon as the customer receives the invoice. When customers agree to this term, it can boost your cash flow and give you a head start on collecting the payment because you don't have to wait 30 days. Though you may find that not all customers receive these invoices with the same level of urgency as it is intended.

Invoice payment terms by industry

Most companies should follow their designated standard payment terms by industry. In other words, when you state your terms for payment, make sure they're something your customers will recognize. For example, most manufacturers expect 30-day payment terms, whereas the construction industry typically settles for 60- or 90-day terms, and government agencies prefer 90- or 180-day terms.

Companies selling commodities want payment within a few days at most. If you ship products to consumers, it's not uncommon to ask for COD (cash on delivery).

The takeaway here: You shouldn’t do anything out of the ordinary or you'll wind up creating confusion and risk receiving a late payment. Talk to others in your industry, ask questions at trade shows, do your research.

Enforcing invoice payment terms

If you take your payment terms seriously, your customers will too. If you say Net 30 and a customer doesn't pay, then consider charging interest or holding out on orders or services.

It’s a good idea to develop and implement a formal collection process and policy for late payments. And if a customer is a known late-payer, then try to up your prices to cover the additional time and effort it takes to collect from them or take a deposit upfront.

Most importantly, give customers an easy way to pay, which, in turn, may help you get paid faster.

Learn more about PayPal Invoicing.