Common Invoicing Terms Explained

Invoice Payment Terms Explained (With Examples)

Invoice payment terms are crucial for managing your business's cash flow. They define when a client is expected to pay for the goods or services rendered. Understanding these terms ensures timely payments and avoids potential financial strain.

Here's a breakdown of the most common invoice payment terms you'll encounter:

How to Choose Invoice Payment Terms (Fast Guide)

Selecting the right payment terms involves balancing your need for prompt cash flow with your clients' expectations and capabilities. Consider these factors:

• Your Industry Standards: What are typical terms in your sector?
• Client Relationship: Established clients might qualify for longer terms.
• Your Cash Flow Needs: How quickly do you need to be paid?
• Risk Tolerance: Are you comfortable extending credit?
• Offer Incentives: Consider discounts for early payment to encourage faster transactions.

Always clearly state the chosen terms on your invoice to avoid confusion.

Net Invoice Terms (Net 7 to Net 90)

Net terms are the most common type of payment terms. They specify the number of days a customer has to pay an invoice, starting from the invoice date.

Net Terms Timeframes

• Net 7: Payment is due within 7 days of the invoice date.
• Net 15: Payment is due within 15 days of the invoice date.
• Net 30: Payment is due within 30 days of the invoice date. This is a very common standard.
• Net 60: Payment is due within 60 days of the invoice date.
• Net 90: Payment is due within 90 days of the invoice date. This is often used for larger projects or specific industries.

For example, if an invoice is dated March 1st and terms are "Net 30," the payment would be due by March 31st.

EOM and Prox Invoice Terms (Month-End Due Dates)

These terms offer a bit more flexibility, aligning payment deadlines with the end of the month.

• EOM (End of Month): Payment is due by the end of the month following the invoice date. For example, an invoice dated March 15th with "Net EOM" terms would be due by April 30th.
• Prox (Proximo): Similar to EOM, "Prox" means payment is due by the end of the month following the month of the invoice. An invoice dated March 15th with "Prox" terms would also be due by April 30th. The main difference is how the month is counted.

These terms are beneficial for businesses that prefer to consolidate their bill payments at month's end.

Due on Receipt vs. Due on Delivery Terms

These terms require payment immediately upon invoicing or delivery, minimizing the credit risk for the seller.

• Due on Receipt (D/R): Payment is expected immediately upon receiving the invoice. This is often used for smaller businesses, new clients, or high-value transactions.
• Due on Delivery (DOD): Payment is due at the time the goods are delivered or services are completed. This is common in retail or for COD (Cash on Delivery) transactions.

These terms are ideal for businesses that need to ensure immediate cash flow or have concerns about a client's creditworthiness.

Prepayment Invoice Terms (PIA/CIA/CWO)

Prepayment terms require the customer to pay before the goods are shipped or services are rendered. This significantly reduces the seller's risk.

Cash Before Shipment (CBS) Invoice Terms

This is a straightforward prepayment term. It means the seller will not ship the goods or provide the service until they have received full payment. Other related terms include:

• PIA (Payment in Advance): The customer must pay the full amount before any goods are shipped or services are rendered.
• CIA (Cash in Advance): Similar to PIA, requiring payment upfront.
• CWO (Cash with Order): Payment is made concurrently with placing the order, before shipment.

How Cash Before Shipment Works

When using CBS terms, the seller typically sends an invoice or proforma invoice for approval. Once payment is received, the seller proceeds with fulfilling the order.

Benefits And Risk Reduction

Prepayment terms are excellent for:

• Minimizing credit risk and potential bad debts.
• Improving immediate cash flow.
• Securing commitment from the buyer.

They are particularly useful when dealing with new clients, international buyers, or custom-made products.

Milestone Invoice Terms (50/40/10 and Variants)

Milestone invoicing is common for projects with distinct phases. Payment is tied to the completion of specific milestones.

• Example: 50/40/10 Split:
  • 50% payment due upon signing the contract or project kickoff.
  • 40% payment due upon completion of a major project milestone.
  • 10% payment due upon final project delivery and acceptance.

This structure helps manage project finances, ensuring the service provider is compensated for work completed and the client pays as deliverables are met. It's effective for services like software development, construction, or consulting.

Early-Pay Discounts, Late Fees, and Interest Terms

These terms are added incentives or penalties to encourage timely payments and compensate for delays.

• Early-Pay Discounts: Offered to encourage clients to pay before the official due date.
  • Example: 2/10 Net 30: This means the client can take a 2% discount if the invoice is paid within 10 days; otherwise, the full net amount is due within 30 days.
• Late Fees: Applied if payment is not received by the due date.
  • Example: "A late fee of 1.5% per month will be applied to all overdue balances."
• Interest on Overdue Balances: Similar to late fees, this charges a percentage of the outstanding amount for each period the invoice remains unpaid.

Clearly stating these conditions on your invoices can significantly improve your collection rates.