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A Guide to Payment Terms

Updated: Sep 15, 2023

Setting appropriate terms of payment is crucial for any business, especially when you're just starting out and unsure about what to include. Establishing the right payment terms for both your business and customers is essential to maintain a smooth cash flow and efficient payment processing. When determining your payment terms, you have a range of options to consider. Here are some common examples of payment terms that are frequently observed:


Net Payment Terms (Net 7, Net 10, Net 30, Net 60, Net 90): These terms signify that payment is due within a specified number of days from the date of the invoice. For instance, if an invoice is issued on July 1st with Net 30 terms, the payment should be received by July 31st, or within 30 days.


End of Month (EOM): EOM requires payment to be made by the end of the month in which the invoice was sent. If an invoice is sent at any time during August, the payment is expected by the end of August.


Cash on Delivery (COD): COD necessitates payment at the moment goods or services are delivered. This is often employed for swift or small transactions, or in situations where there's a trust concern between parties.


Advance Payment: This involves receiving a partial or full payment from the customer before delivering goods or services. It's common for custom projects or substantial orders and safeguards the business against potential financial loss if the customer changes their mind.


Milestone Payments: Under milestone payment terms, payments are made in increments as specific project stages are completed. This approach is frequent in ongoing projects, and milestones are typically predetermined by mutual agreement between the business and the customer.


Key Considerations:


Industry Context: Tailor your payment terms to align with industry standards. Research prevalent practices in your industry and those of your competitors to ensure consistency and enhance customer satisfaction.


Cash Flow Requirements: Balance customer convenience with your cash flow needs when determining payment terms. Longer terms provide flexibility but may negatively impact cash flow, while shorter terms can enhance cash flow but might inconvenience customers.


Transaction Size: The size of the transaction should influence your payment terms. Larger transactions may warrant extended payment periods to accommodate fund availability. Consider adjusting terms for custom projects or significant orders to mitigate potential financial risks.


Buyer-Seller Relationship: Factor in the relationship with the buyer when setting payment terms. Recognize loyal, long-term customers with favorable terms, while new customers or those with uncertain credit histories might require stricter terms.


Clarity and Communication: Ensure clear and concise terms to avoid misunderstandings. Written terms without confusing language or jargon provide a reference point for both parties and contribute to customer ease and understanding.


Regular Review and Adjustment: Evolve your payment terms as your business grows. Communicate changes to customers and strike a balance between appealing terms and maintaining your business's financial stability.


Establishing well-defined and balanced payment terms is essential for creating a positive customer experience while safeguarding your business's financial health.

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