Payment Terms

What Are Payment Terms?

Payment terms are the conditions that specify when and how a customer must pay for goods or services. They establish deadlines, payment methods, and consequences for late payment.

For B2B companies, payment terms directly affect cash flow. A company selling $100,000 worth of services might have very different financial outcomes depending on whether customers pay immediately, in 30 days, or in 90 days.

Common Payment Term Structures

Net Terms

Net terms specify the number of days a customer has to pay after receiving an invoice:

• Net 30: Payment due 30 days after invoice date

• Net 60: Payment due 60 days after invoice date

• Net 90: Payment due 90 days after invoice date

The calculation is straightforward: if an invoice is dated January 1 with Net 30 terms, payment is due January 31.

Immediate Payment

Due on Receipt: Payment expected immediately when invoice is received. Used for high-risk customers or small transactions.

Cash in Advance (CIA): Full payment required before work begins or goods ship. Common for custom work or new customer relationships.

Cash on Delivery (COD): Payment required when goods are delivered. More common in physical goods than SaaS.

Discount Terms

2/10 Net 30: Customers receive a 2% discount if they pay within 10 days, otherwise full payment is due in 30 days. Used to incentivize faster payment.

Installment and Milestone-Based

Installment payments: Payment split into multiple scheduled payments. A $120,000 annual contract might be billed as four quarterly payments of $30,000.

Milestone-based: Payment tied to specific deliverables rather than time periods. Common in consulting and custom development where 25% might be due at contract signing, 25% at design approval, 25% at beta launch, and 25% at final delivery.

Why Payment Terms Matter

Payment terms affect three key areas:

Cash Flow Management: A company with Net 90 terms needs enough working capital to cover 90 days of operations while waiting for customer payments. The same company with upfront payment has immediate access to cash.

Days Sales Outstanding (DSO): DSO measures how long it takes to collect payment. Shorter payment terms generally result in lower DSO, improving working capital efficiency.

Customer Relationships: Flexible payment terms can be a competitive differentiator, particularly in markets where products are similar. However, overly generous terms increase the risk of non-payment.

How Billing Systems Handle Payment Terms

Modern billing platforms automate payment term enforcement:

Due Date Calculation: Systems automatically calculate payment due dates based on invoice generation and specified terms.

Payment Reminders: Automated email sequences send reminders before, on, and after the due date.

Late Fees: Systems can automatically calculate and apply late payment fees based on configured rules.

Payment Method Enforcement: For recurring billing, systems can require automatic payment methods (credit card or ACH) rather than allowing invoice payment.

Customizing Terms by Customer Segment

Many B2B companies use different payment terms for different customer types:

• New customers: Prepayment or short terms until payment history is established

• Established customers: Standard Net 30 based on demonstrated payment reliability

• Enterprise customers: Extended terms (Net 60 or Net 90) negotiated as part of larger contracts

This segmentation balances risk management with competitive positioning.

Common Challenges

International Payments: Cross-border transactions involve currency conversion, international wire fees, and different banking timelines. Payment terms should account for these delays.

Enforcement: Pursuing late payments can strain customer relationships. Automated reminders and clearly communicated policies help remove personal friction while maintaining payment discipline.

Balancing Sales and Finance: Sales teams often want flexible terms to close deals faster, while finance teams want stricter terms to protect cash flow. This tension requires clear policies and approval processes.

Regulatory Considerations

Payment terms aren't entirely at a company's discretion. The EU's Late Payment Directive (2011/7/EU) sets a maximum payment term of 60 days for most B2B transactions between businesses in EU member states. Some member states have stricter limits.

In the United States, payment terms are generally not regulated at the federal level, though individual states may have specific requirements for certain industries.

Implementation Best Practices

Make Terms Explicit: Include payment terms clearly on invoices, contracts, and purchase orders. Specify the exact due date calculation method.

Align with Customer Procurement: Large enterprises often have 60 or 90-day procurement cycles built into their systems. Understanding this during the sales process prevents surprises.

Monitor and Adjust: Track which customer segments pay on time and which don't. Use this data to refine term policies.

Use Modern Billing Systems: Platforms like Meteroid automate term enforcement, calculate due dates, send reminders, and generate aging reports without manual tracking.

When to Revisit Payment Terms

Review payment terms when:

• DSO increases significantly

• Bad debt rises above acceptable thresholds

• Competitive pressure requires more flexible terms

• Customer payment patterns change

• Business model shifts (e.g., moving from project-based to subscription)

Payment terms are a key lever in revenue operations. They require balancing financial discipline with market competitiveness and customer needs.