What are Payment Terms? Examples and Meanings

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Optimally paying business invoices requires an understanding of payment terms. If you’re not paying attention to Invoice terms, you may lose early payment discounts that would improve your company’s cash flow or incur late fee penalties for past due invoices. 

This guide provides a payment terms definition, common payment terms examples, and explains their meaning and importance. 

What are Payment Terms?

Payment terms are specifications of amounts owed, how, when, and where payments are due on sales transactions between sellers and buyers. Payment terms from a contract or purchase order are included on an invoice to the customer. Although payment terms may be negotiated, often the seller sets payment terms for routine sales transactions. 

Information Included in Payment Terms

Payment terms include the amount, invoice date, how to pay, payment methods, early payment discount percentage, penalties, and due dates. The list of specific information commonly included in invoice payment terms is even more comprehensive. 

Payment terms include who, when, where, what, and how to pay. If you’re thinking of the Five Ws that journalists use to write a story, there’s an extra H for how instead of a W for why. You can figure out the why if your business wants to avoid empty inventory shelves or the ramifications of unpaid invoices. 

Understanding Payment Terms

Have you thought about this true statement? Technically ANY purchase has payment terms. 

Devote a little time to understanding payment terms. Apply productive payment term strategies and tactics. You’ll help optimize your company’s cash flow and ability to receive shipments from vendors when needed. Contributing to company results earns recognition, increases competence, differentiates you from your peers, and may justify a pay raise or promotion. 

Which types of items on an invoice are payment terms?

Invoice payment term types include:

  • Invoice date
  • Days due/early payment discount percentage terms (net 30, 2/10 net 30, COD, etc.)
  • Additional terms or payment methods for international shipments 
  • Payment due date
  • Invoice amount
  • Accepted payment methods
  • Where to pay (online website URL, mailing address, or physical location)
  • Other payment terms and conditions

Payment terms can include cash in advance (CIA), cash with order (CWO), cash before shipment (CBS), cash on delivery (COD), cash next delivery (CND), barter terms, or specified payment terms for purchases on account that are payable after receiving the goods or services. 

Businesses can exercise creativity in setting payment terms. This list isn’t complete (see Common Examples of Payment Terms below). 

Payment methods for global trade, according to the U.S.-based International Trade Association,  include:

Cash-in-advance (CIA) is the least risky method. Consignment is the riskiest because the seller doesn’t get paid until the item is sold by the buyer to a future customer. 

Common Examples of Payment Terms

Companies often use standard payment terms for routine transactions for credit-worthy customers. Some payment terms are transaction or customer-specific. 

Customers with financial problems may be assigned CIA (cash in advance), PIA (payment in advance), or COD terms by the seller’s credit department to avoid non-payment. A COD customer pays through the final-mile delivery company, like UPS, when their purchased items are delivered. The delivery company transmits payments to the seller (via direct deposit) within about two days. 

Payment Timing, Due Dates, and Discounts Offered

Some due dates are paired with early payment discounts offered, like 2/10 net 30, which offers the customer a 2% discount on invoices paid within 10 days of the invoice date. 

Although Net 30 and Net 60 are the most common payment due date terms with no discount, the seller may specify a different due date like Net 10, Net 15, Net 45, or Net 90 instead.  

As part of the payment process, invoices with a payment date that’s due after the delivery date are included in the customer’s accounts payable journal before they are paid.  

Common Payment Terms for Payment Due Dates 

Payment Term AbbreviationPayment Term NameDescription
CIACash in AdvanceSeller requires upfront payment by the customer before order shipment.
PIAPayment in AdvanceThe customer must pay the seller before delivery of goods or work starting on a project. Payment in Advance on a contractor’s construction project is a stage payment that may require a 10% to 50% upfront deposit. 
CWOCash with OrderThe customer must include payment when submitting an  order. 
CBSCash before ShipmentThe customer is required to pay the seller before the shipment of goods.
COD Cash on Delivery (or Collection on Delivery)The customer provides immediate payment through the delivery company when the goods are delivered. COD is essentially a Net 0 payment, also known as Due Upon Receipt.
CNDCash Next Delivery The customer must pay for the previous recurring order to receive the next order. 
Net 30Net 30 The invoice is due for payment by the customer within 30 days of the invoice date. The seller offers no prompt payment discount. 
2/10 Net 302/10 Net 30The seller is offering the customer an optional early payment discount of 2% if the invoice is paid within ten days of the invoice date, or the total amount of the invoice is due within 11 to 30 days. (A different percentage discount or number of days due to earn an early payment discount can be specified as a variation of this type of invoice term.) 
Net 60Net 60 The invoice is due for payment by the customer within 60 days of the invoice date. The seller offers no prompt payment discount. 
EOMEnd of MonthThe invoice is payable by the end of the month in which it is issued, with no discount. 
MFIMonth Following InvoiceFor an invoice with 20 MFI terms, an invoice issued after the 20th of the month is due on the 20th of the following month. An invoice issued before the 20th of the month is due by the 20th of the same month as the invoice date. 

International Payment Terms

Payment methods for global trade, according to the U.S.-based International Trade Association,  include:

  • Cash-in-advance
  • Letters of credit
  • Documentary collections
  • Open account
  • Consignment

Cash-in-advance (CIA) is the least risky method. Exporters may use cash in advance terms to ensure that foreign buyers pay for goods shipped to them. Consignment is the riskiest payment method because the seller doesn’t get paid until the buyer sells the item to a future customer. 

Payment Methods

Payment terms include payment methods. Having a choice of accepted payment options lets your business use its preferred payment method that will provide security at a reasonable cost. Payment methods can include electronic ACH bank transfers in the U.S., global ACH payments like SEPA payments in Europe, wire transfer, credit card payments, debit card, PayPal, cryptocurrency like Bitcoin or Ethereum, or even a paper check.

How to Set Payment Terms

The seller often sets payment terms and can implement them in their accounting software or ERP system. Negotiation of payment terms by seller and buyer can be used for some purchase transactions, especially those involving unique contracts. 

How to Include Payment Terms on an Invoice

Include payment terms on an invoice using standard fields from your accounting software, add a note clearly wording the due date and any early payment discount offered, add a URL/link to an online payment page on a website, billing department contact information for questions, and other details to obtain timely payment from the customer. 

Importance of Payment Terms

Payment terms are important because they determine when and how much cash will be required for making businesses purchases. They’re essential for cash forecasting, cash flow, and cash management. Payment terms can invite lucrative cash savings opportunities through taking prompt payment discounts. When 2/10 net 30 early payment cash discounts are annualized, they equate to a 36.7% rate. 

Invoice payment terms include expected payment dates. These terms make it easy for customers to set up bills for payment by the due date and avoid late payment fees. 

Strict payment terms requiring customer payment before delivering items or services can eliminate a seller’s risk of not being paid. Payment terms help the seller receive customer payments approximately when due or earlier by offering early payment discounts. Sellers can specify late fee percentages as payment terms, usually assessing 1% or 2% of the unpaid invoice amount as a penalty.

Sellers, especially small businesses with limited cash, have the option of invoice factoring to get paid immediately on open invoices in their accounts receivable balance. Invoice factoring speeds cash flow. 

Businesses report current accounts receivable balances (in their monthly Borrowing Base Certificate) to maintain a bank line of credit as a financing source. Payment terms are required to determine the age of the invoices in the accounts receivable balances. 

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