What are Payment Terms? | F&A Glossary (2024)

FAQs

What are Payment Terms? | F&A Glossary? ›

Payment terms are the conditions and parameters of payment for an item or service, set by the seller for the customer. These will include such considerations as whether the payment can be made in installments, by credit or cash, if interest will be charged, and when payment must be completed.

What is a term of payment? A term of payment, also sometimes called payment term, is documentation that details how and when your customers pay for your goods or services. Terms of payment set your business's expectations for payment, including when clients pay and what penalties they may receive for missed payments.

Payment terms are agreed-upon conditions between two parties that specify how, where, and when the agreed price is to be paid. In addition to the payment amount, the time of payment, and the currency, payments terms include the type of payment, i.e., the means of payment or the payment method.

What are standard payment terms? Standard payment terms set out the usual payment times for your customers, and may vary depending on where your business is based, what's seen as 'normal' within your given sector or industry, and what credit terms you're comfortable agreeing with your customers.

Common forms are net 10, net 15, net 30, net 60, and net 90 (also written as net 10 days, etc.). Standard payment terms of 30 days, for example, could be designated as net 30 or net 30 days, indicating payment is due on the invoice amount 30 days after delivery of goods or services.

There are five primary methods of payment in international trade that range from most to least secure: cash in advance, letter of credit, documentary collection or draft, open account and consignment.

Payment term codes can range from simple to complex, depending on your organization's policies. You define a payment term by using a one-, two-, or three-character combination of these types of characters: Alphabetic (A–ZZZ) Numeric (0–999)

A payment terms clause in your Terms and Conditions agreement is where you disclose details such as how your business will process transactions electronically, what forms of payment you accept and what happens if the buyer cancels a transaction.

Who sets payment terms? ›

Who sets them? Payment terms are usually set by the seller, or in this case, the freelancer. It's unusual for the buyer to be the one that dictates payment terms. For example, when you pay for an item in a shop you pay by the shop's accepted payment methods, such as cash or card.

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.

Before you start working with a new customer, make sure they understand and agree to your payment terms. Explain the terms verbally to your client and include a written description in the contract you send. This will help eliminate any misunderstandings about how much customers owe you and when payment is due.

The more common payment terms are net 30 and net 60. Net 30 means that the business owner expects payment within 30 days from the invoice date. Net (number of days) is a credit term that means a business delivered a product or service first in expectation of receiving compensation at the stated date.

The Average Payment Period (APP) is the average time period taken by a company to pay off their dues against the purchases made on a credit basis from the supplier. The formula for calculating the average payment period is Average Accounts Payable multiplied by Days in Period and divided by Total Credit Purchases.

The 1%/10 net 30 calculation is a way of providing cash discounts on purchases. It means that if the bill is paid within 10 days, there is a 1% discount. Otherwise, the total amount is due within 30 days.

C.I.A. payment terms. C.I.A. stands for “cash in advance”. This means that the payment is due before the shipment is delivered.

So a Net EOM 5 is due five days after the calendar month ends. This can be confusing to keep track of since the due date isn't as straightforward as Net 30 is, so most small businesses go without using it.