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What are Payment Terms?

Payment terms are the conditions under which a seller will complete a sale. Typically, they outline the timeframe for payment, acceptable payment methods, and any discounts for early payment or penalties for late payment. Understanding these terms is crucial for managing cash flow in business. How might your company benefit from optimizing payment terms? Continue reading to find out.
Mary McMahon
Mary McMahon
Mary McMahon
Mary McMahon

Payment terms are conditions surrounding payment for a sale, providing a time frame in which a customer can pay without late penalties or additional fees. If the customer pays early, this may provide access to a discount. Late payments are subject to a penalty fee, and if the customer pays extremely late or repeatedly pays late, the seller may change the payment terms, obliging the customer to pay earlier. These terms are part of the contract buyers and sellers sign at the start of a business deal, to make sure everyone understands the expectations surrounding the agreement.

Some payment terms require cash in advance. This is common with new customers, as the seller does not have an established business relationship. Consumers ordering goods often pay in advance as well. Sellers can also request cash on delivery. When the goods arrive, the buyer must furnish the payment. Shippers collect the cash on delivery payments and can withhold the shipment until the payment arrives.

Some payment terms require cash in advance.
Some payment terms require cash in advance.

More commonly, payment terms offer credit options. Terms of 30, 60, or 90 day are common, allowing customers to pay within those time periods without penalty. Some provide an incentive discount; if a customer pays in the first 10 days, for example, there may be a discounted price. Some bills provide information about how much customers will pay in late fees if they submit payments late; the bill may have separate fields for payments sent within one and 30 days, 31 and 60, and so forth.

If a customer does not pay on time, the seller may change the payment terms.
If a customer does not pay on time, the seller may change the payment terms.

The payment terms are subject to change between contracts. Sellers may decide to change the terms across the business for a variety of reasons, expecting all customers to adhere to new guidelines. They may issue an advisory to alert long-term customers to the change so they can adjust their accounting practices. Individual sellers can also face changes in payment terms based on their past behavior with the business. Customers who always pay promptly in advance or on delivery may receive an offer of credit. Conversely, if payments are routinely late, the payment terms may change to cash on delivery or prepayment to protect the seller from risks.

It is important to review payment terms closely and to take note of when they take effect. Usually the date on the bill marks the point when the clock starts ticking. If customers receive bills late, they should contact the seller to discuss the situation. Electronic billing has greatly reduced the risk of mail delays and makes it more challenging for buyers to claim they didn't receive a bill until on or near the due date.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...

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    • Some payment terms require cash in advance.
      By: Nomad_Soul
      Some payment terms require cash in advance.
    • If a customer does not pay on time, the seller may change the payment terms.
      By: sergign
      If a customer does not pay on time, the seller may change the payment terms.