Just like an expense sheet is incomplete without itemized costs, an invoice is incomplete without clear payment terms. Whether you create an invoice online or on paper, mentioning payment terms is important.
This is especially crucial for businesses looking to combat payment delays. When you send an invoice along with clear payment terms, it helps your client learn their payment responsibilities and encourages them to complete the payment.
Highlighting payment terms on invoices also helps businesses settle false claims made by customers and improve their cash flows. Plus, you have fewer unpaid invoices to deal with, allowing you to concentrate on forming business strategies and delivering your services on time.
In this guide, we will walk you through what are invoice payment terms, their types, and payment terms examples. Ready? Let’s find out.
What are Invoice Payment Terms?
Invoice payment terms refer to specifications of when and how the client should make the payment. The terms also clarify what are acceptable payment methods, the due date, and applicable late fees once the due date is passed.
Such payment terms are included on an invoice to minimize late payments. They help the recipient know how soon they need to clear their dues to avoid late payment fees, encouraging them to process the payment as quickly as possible.
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Different Types of Payment Terms
Here are common payment terms used by businesses to let their buyers know how quickly they need to complete the payment.
1. CIA (Cash in Advance)
It is a payment term that states the client must pay in advance rather than making payment after receiving the goods. This approach is often adopted by sellers to eliminate risk of non-payment. CIA terms are commonly utilized in industries like logistics and transportation, where upfront payment ensures financial security.
2. CBS (Cash Before Shipment)
CBS payment term is quite similar to CIA where the buyer needs to complete the payment before the seller dispatches the goods. The buyer doesn’t need to pay the money before the production starts but only before the product is ready for shipment. So, unlike a CIA, it offers buyers more time as they can process the payment anytime before the shipment.
3. CND (Cash Next Delivery)
It is usually used when there are more deliveries. If a CND is mentioned as payment terms, then the buyer needs to pay for the delivered goods, and before the start of the next delivery. CND payment terms offer some flexibility as payments aren’t made upfront.
4. COD (Cash on Delivery)
Cash on Delivery (COD) specifies that full payment must be made at the time of delivery of the products or services. Under this payment term, the buyer is obligated to pay the amount immediately upon receiving the goods. COD ensures that the seller is paid promptly, while the buyer can verify the delivery before making the payment.
5. CWO (Cash With Order)
Whenever the Cash With Order (CWO) is written as a payment term, the buyer is required to send money while placing the order. CWO ensures that the seller gets paid before even the start of the production or delivery. Such payment terms are used by those who accept bulk orders.
6. EOM (End of Month)
EOM means that the payment due date will be a certain number of days after the invoice month. In this case, the client must clear their dues within the month in which the invoice was received. This payment term sets the due date based on when the invoice is received, instead of the product or service delivery date.
7. PIA (Payment in Advance)
PIA refers to a portion of the payment made in advance to cover material costs. This payment term requires the buyer to pay before the work begins. The seller may also include PIA to collect full payment upfront.
8. PPD (Prompt Payment Discount)
This type of payment term is utilized by the seller to encourage clients to make early payments in order to benefit from the discounts. So, if the client clears the due amount promptly, they are eligible to receive discounts on the total outstanding amount. It ensures payments are made quickly, nullifying the risk of late payments.
9. CAD (Cash Against Documents)
Often used for international transactions, this payment term informs that the recipient must make the payment before receiving the shipping documents. Once the payment is made, the seller will hand over the shipping documents, which further allow them to import goods. CAD makes sure that the seller receives the payment before the buyer collects the goods.
10. MFI (Month Following Invoice)
MFI requires the client to make payment within a month, starting from the date the invoice is received. Therefore, whenever MFI is mentioned as a payment term, the client must clear the dues by the 30th of the month. However, if the due date is missed, the client may incur additional charges in the form of penalties.
11. Net 30/60/90
Net payment terms like net 30, net 60, or net 90 clarify how much time the client has to complete the payment. Clients need to pay their dues before or on the due date based on the payment terms. For example, net 30 payment terms allow clients to make payments within 30 days. Following the due date, the seller may impose applicable penalties.
12. 2/10 Net 30
It is a part of net 30 payment terms where the seller offers a 2% discount if the buyer makes the payment within the first 10 days of issuing an invoice. The buyer can still pay the money anytime during 30 days, but they won’t get discounts on the total amount. This way, 2/10 net 30 accelerates the payment process.
13. Early Payment
This type of payment term is added by the seller to inspire the buyer to pay the pending amount as soon as possible. This term doesn’t guarantee early discounts but informs the buyer about the urgency of the payment, helping the seller to collect the money at the earliest.
14. Contra Payment
Contra payment comes into effect when both parties owe money. In this case, the buyer will provide the necessary supplies for services or products they receive. So, the amount is offset against, simplifying the payment collection process.
15. Terms of Sale
They are conditions that help the buyer understand their responsibility to settle the pending dues once the product delivery is completed. Such payment terms are mentioned by the seller to clarify the payment deadlines and potential penalties if there is any delay.
16. Payment Plan Details
Payment plan details consist of when and how much payment should be made over a specified period. The client is required to send the payment either weekly or monthly as per the payment plan described in an invoice. Payment plan details are often required when there is no need for upfront payment.
17. Short Payment Periods
The short payment periods are payment terms that inform clients the seller has reduced the time frame for completing payments. With this term, the seller notifies the client about the change in payment conditions. For example, the seller might initially offer a net 90 term but later revise it to a net 60 term.
Example of Payment Terms on an Invoice
Here is one of the payment terms examples showcasing how terms & conditions should be written on an invoice. This example shows how keeping payment terms short and easily understandable leads to faster payment. Refer to the example below.
How to Use Payment Terms?
As a business owner, you can add payment terms while preparing a new invoice or contract. When you clearly highlight payment terms and conditions, they leave no miscommunication gaps and inspire clients to opt for early payments.
Also, you can utilize automation tools like Moon Invoice to enhance the readability of your payment terms and improve invoice quality. Using such an automated process will ensure your clients understand the payment terms and complete the payment in a timely manner.
Apart from focusing on how to use payment terms, you should give equal importance to how to choose the right invoice terms and conditions. So, let’s find out.
How to Choose Invoice Terms and Conditions
If you are wondering which payment terms need to be included in an invoice, then here are a few points to keep in mind.
- Consider a Business Type
It goes without saying that different businesses need different payment terms. So, according to your business type, you need to select the payment term that aligns with your business offerings and enables clients to pay money promptly. For example, If you perform product deliveries, you might need payment terms like CWO, PIA, or COD. - Assess Client History
Check the client history before mentioning the payment terms. If the buyer is delinquent and often pays late, then you need to describe strict payment terms along with hefty penalties. However, if the person is found making timely payments, then you can offer flexible payment terms like 2/10 net 30. - Include Industry Norms
The inclusion of payment terms also relies on which industry you serve. Therefore, consider your industry norms before adding payment terms and conditions. After all, you need to make sure the described payment terms don’t go unnoticed and draw payments quickly.
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Best Practices for Invoice Payment Terms
Utilize these practices while invoicing your clients to make sure your clients don’t take too long to make payments.
1. Adopt Right Invoicing Software
Invoices made through online software offer a clear idea of payment terms in comparison to paper-based invoices. Therefore, investing in reliable invoicing software can make a difference as far as invoice payment terms are concerned. You can make an invoice outlining payment terms that are easy to read by clients, prompting faster payments.
2. Discounts on Early Payment
Consider rolling out discount offers for those who pay early. This is a modern invoicing practice that has been utilized by businesses to receive payment on time and simultaneously, drive customer loyalty. It will also inspire delinquent clients to pay early in order to benefit from discounts on an invoice.
3. Payment Flexibility
Not all of your clients will go by the cash payment. Some may prefer to pay online via net banking or e-wallets. When you make an invoice, attach a payment link or different online methods if clients want to pay remotely. This will significantly reduce unpaid invoices, allowing you to clear business expenses timely and focus on business activities.
4. Short Payment Terms
Always add your payment terms using short one-liners to make it easier for clients to understand how soon you are expecting the payment. If you include late payment fees in an invoice, make it bold or highlight fonts in such a way that it captures the client’s attention. By doing so, you won’t have any back-and-forth once an invoice is issued.
What are Standard Payment Terms?
Standard payment terms are pre-defined limits within which customers are required to pay their dues. While invoicing terms may offer short or long payment periods, standard payment terms have only one specified payment period. Depending on your industry, standard payment terms typically range between 15-30 days, during which customers are expected to make the payment.
Using standard payment terms is essentially a traditional way of providing time to clear payments. However, as modern businesses allow more flexible payment terms, standard payment terms have now been largely by invoicing terms.
How Does Moon Invoice Help You Avoid Late Payments?
A sophisticated invoicing software, Moon Invoice helps you prepare a professional and accurate invoice that encourages clients to pay faster. It ensures no revisions once an invoice is made and aids clients in understanding the payment terms.
It requires a minute or less to generate a nice-looking invoice and enables clients to pay conveniently using online methods, helping you get paid in a timely manner.
This automated invoicing process neither leaves room for errors nor deteriorates the quality of an invoice. That’s how you can get rid of late payments and cultivate business growth.
Here are some of Moon Invoice’s features designed to facilitate your invoicing process.
- Readymade invoice templates
- Invoice tracking
- Send an invoice via WhatsApp or Email
- Thermal print
- Sales reports
- 20+ payment integration
- Cloud storage
- Offline sync
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Conclusion
Whether you perform customer transactions or deal with vendors, invoice payment terms are necessary as long as you want to maintain clear communication and cut off payment delays. By now, you should have a better idea of which payment terms work best for your needs.
As discussed, payment terms are easier to understand when clearly highlighted on a digital invoice rather than on a poorly written one. Invoicing software like Moon Invoice is perfect for creating online invoices that minimize delays and help you receive payments faster. Start using it for free today!
Frequently Asked Questions
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
