Payment Terms are the conditions by which an invoice or contract will be paid. These terms are typically specified in a contract or arrangement and agreed upon by both parties.
The terms of payment will specify:
- types of payment options allowed.
- any prepayments that are due up front.
- the total invoiced amount due.
- due date or
- how much time is allowed to pay off the total invoiced amount or
- how often payments will be made.
- the name of the business or person being paid.
- where the payment should be sent (whether an address to send a check or banking information for ACH or wire payments).
- discounts for early payments or paying in full.
- late fees or other consequences for late payments.
What determines payment terms?
Your accounting department or credit manager should be involved in deciding payment terms for clients. Here are some questions to consider when defining payment terms:
Is the business well-established? A brand new business may not have a solid credit record yet. A strict payment policy or incentives for paying early may be advisable.
What is the client's credit-worthiness or payment history? A credit manager will be able to provide more detail into the client's ability to pay on time. If they have a solid credit history, payment terms can be as simple as "net 30".
Is the client a repeat offender of late payments? Pay attention to red flags that may signal an unreliable client. If there's a potential of late or unpaid invoices, payment terms should include late payment fees and a collections policy.
How do Payment Terms protect my business?
When payment terms are spelled out in a contract, both parties sign and have clarification on payment expectations. Your client knows who to pay, when to pay, how to pay, and what happens when they don't pay. If the client isn't paying on time or refuses to pay, a signed contract specifying payment terms is a binding legal agreement to help collect on what's owed to you.