When you run a business, understanding the basics such as payment terms, is essential. But what are payment terms on an invoice anyway? And how do they impact your B2B transactions?
In this simple guide, we’ll walk you through everything you need to know about what are payment terms on an invoice, including how they work, common examples, and how to choose the best terms for your business. These terms help you ensure smooth cash flow and avoid late payments, whether you run a small business or handle wholesale operations.
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What Are Payment Terms On An Invoice? And How These Work
Payment terms on an invoice describe the rules about when and how a buyer needs to pay for goods or services. In other words, they explain how much time the buyer has to pay and whether there are any discounts for paying early or penalties for paying late. These terms are essential because they help the buyer and seller manage their cash flow.
For example, in a B2B setting, payment terms can make a big difference in how a business manages its expenses and revenue. Imagine a small business that buys supplies. If a supplier offers a term of “Net 30,” it means the buyer has 30 days to pay the full amount. This can be helpful for small businesses because it gives them time to sell the products and make money before they have to pay the supplier. On the other hand, a bigger wholesale business that buys in large quantities might need more time and may negotiate for terms like “Net 60” or even “Net 90” to keep their cash flow balanced.
If there are payment delays, it can cause problems for other parts of the business, like paying employees or ordering more supplies. Having clear terms for your business means that everyone knows exactly when to expect payment. This is especially important for B2B transactions, where larger orders can take more time to fulfill.
Common Types Of Payment Terms And Their Acronyms
There are several types of invoice payment terms that businesses use, and each one has its benefits. Let’s break down some common invoice payment terms and their acronyms so you can understand which ones might work best for your business:
1. Cash account
Buyers must pay immediately upon receiving goods or services, with no credit offered. For many businesses, this is helpful because it keeps cash flow steady. However, it can also be challenging for buyers who may need some time to arrange funds, especially for big purchases.
2. Cash before shipment (CBS)
Payment must be received before the product is shipped. For example, a supplier might require CBS terms for new customers to lower the risk of not getting paid. This means that before the goods are shipped, the seller needs to have the payment in hand. This is helpful for businesses because it minimizes risk, especially when dealing with new customers who may not have a track record of paying on time.
3. Cash in advance (CIA)
Like CBS, this term means that payment must be made before the goods or services are provided. For example, businesses that make custom products often use CIA terms to protect themselves against not getting paid. This term is common when the goods require a lot of customization or upfront work. It helps ensure that the seller will not lose money if the buyer fails to pay.
4. Cash next delivery (CND)
Payment is due on the next delivery. A wholesaler that delivers goods every week might use CND to make sure payments come in regularly. This helps keep a steady cash flow and avoids long delays between deliveries and payments. It works well for ongoing relationships with regular customers, where both the buyer and seller benefit from a consistent schedule.
5. Cash on delivery (COD)
Payment is made at the time of delivery. This is often used for local deliveries where goods and payments can be exchanged at the same time. COD terms are helpful when there is little trust between the buyer and seller or when the buyer is new. It makes sure that the seller receives payment immediately, reducing any risk of not getting paid.
You may also read about: Same-Day Wholesale Delivery: How To Tell If It’s Right For Your Business.
6. Cash with order (CWO)
Payment is needed when the order is placed. For example, a bakery might require CWO for special cake orders. This means that the buyer must pay in full before the seller starts making the product. CWO terms are especially useful for businesses that deal with customized items because they guarantee that funds are available before any work begins.
7. Contra payment
This method is used when two businesses owe each other money. Instead of each one making a separate payment, they subtract what they owe from each other. For example, if Company A owes Company B $500, and Company B owes Company A $300, they can offset these payments, and Company A will only pay $200. This makes transactions simpler and saves time and costs for both companies. It’s a great way to avoid multiple payments and keep things efficient, especially for businesses that frequently buy from each other.
8. End of month (EOM)
Payment is due at the end of the month when the invoice was issued. This is useful for businesses that like to keep payments predictable. Knowing that all payments are due at the end of the month helps both buyers and sellers with budgeting. It makes financial planning easier and ensures that cash flow is evenly spread out, rather than being unpredictable.
9. Interest invoice
If payment is late, an additional invoice is sent for interest charges. This motivates buyers to pay on time because they don’t want to pay extra. Businesses use interest invoices to make sure that customers pay promptly. By adding interest charges to late payments, it encourages customers to make paying on time a priority.
10. Terms of sale
These are the general rules that the buyer and seller agree on during a sale, like when payments are due or any discounts are offered. Having clear terms of sale helps both the buyer and seller understand what is expected. This helps avoid confusion and makes sure that both parties have the same expectations from the start.
11. Net 7/10/30/60/90
These numbers refer to the number of days given to the buyer to pay the invoice. For instance, “Net 30” means the payment is due 30 days from the invoice date. This is one of the most popular payment terms for B2B transactions because it gives the buyer some time to pay while still being fair to the seller. The length of time can vary based on how well the buyer and seller know each other and how much trust there is between them.
To know more about Net payment terms, you may read our article: WooCommerce Pay Later Plans: How To Let Customers Pay NET 30/60.
12. 2/10 Net 30
This term means that the buyer gets a 2% discount if they pay within 10 days, but if they don’t, the full amount is due in 30 days. This term encourages buyers to pay quickly in exchange for a small discount. It benefits both the buyer, who saves money, and the seller, who gets paid sooner. For example, if a buyer can pay within 10 days, they save money, and the seller benefits because they receive the payment faster, which helps with cash flow.
Understanding what are payment terms on an invoice and these different payment terms can help you choose the best fit for your business transactions. By choosing the right payment terms, you can make cash flow easier to manage and avoid surprises.
How To Choose The Best Payment Terms For B2B
Choosing the right payment terms for your business can be challenging, especially for B2B transactions. Here are five simple ways to make sure you choose the best terms:
1. Know your cash flow needs
First, think about your cash flow needs before deciding on payment terms. Cash flow is the money coming in and out of your business, and it’s very important to keep it steady. If you need money quickly to cover expenses, shorter payment terms like Net 7 or Cash On Delivery (COD) might be better.
These terms make sure you get paid right away, which helps if you have bills or other costs to pay soon. But if you can afford to wait, longer terms like Net 60 or Net 90 can be helpful, especially if you’re working with a customer who is buying a lot from you. Longer terms can make it easier for customers to buy more because they have more time to pay.
have an additional reading here about: How To Improve Cash Flow In Business: 7 Proven Strategies For Wholesalers.
2. Consider the customer relationship
You should also think about your relationship with the customer. If you have a good, long-term relationship and the customer always pays on time, you might want to offer longer payment terms. This can build trust and make the customer feel valued. However, if you’re working with a new customer or someone who has been late in the past, it’s better to start with shorter payment terms. This way, you can protect your business from the risk of not getting paid.
3. Evaluate industry standards
It’s also important to see what is common in your industry. Most businesses want to offer the same terms that other businesses in their industry are offering, so they stay competitive. For example, if most businesses in your field offer “Net 30” payment terms, you should probably do the same. This makes sure that customers don’t choose your competitors just because they have better payment terms. However, if you want to stand out, you could offer a small discount for early payments, which can make your terms more attractive without changing too much.
4. Offer discounts for early payment
Offering discounts for early payment is a good way to encourage customers to pay sooner. For example, terms like “2/10 Net 30” mean the customer gets a 2% discount if they pay within 10 days, instead of waiting the full 30 days. This helps both sides: the buyer saves a bit of money, and you get your money faster, which helps with cash flow. Discounts for early payment are especially helpful if you need a steady flow of cash to cover business expenses.
5. Use a payment plugin for online transactions
Today, many businesses operate online, and it’s important to have a way to handle payments easily. If you use WooCommerce, a payment plugin like Wholesale Payments can help. This plugin lets you set up flexible invoice payment terms and manage the process easily.
You can set automatic reminders, and different payment options, and make the payment process easy for customers. Using a payment plugin saves time and helps you keep track of who owes you a payment. It also makes things easier for your customers, which can make them more likely to buy from you again.
Know more about how you can streamline your payment process here: Wholesale Payments: The Best WooCommerce Payments Plugin For B2B (Full Guide)
Leverage On Wholesale Suite
Wholesale Payments is part of the Wholesale Suite, which is the top toolkit for managing wholesale transactions in WooCommerce. Along with Wholesale Payments, the suite includes Wholesale Prices Premium for setting different prices for different customers, Wholesale Order Form to make ordering faster, and Wholesale Lead Capture to register new customers. This complete solution helps make B2B processes easier, especially when it comes to managing payment terms and customer interactions.
Frequently Asked Questions
How do you express payment terms on an invoice?
To express payment terms on an invoice, clearly write the due date and any conditions. For example, “Net 30” means payment is due 30 days from the date on the invoice. You can also add discounts, like “2/10 Net 30,” which means a 2% discount is available if the payment is made within 10 days.
What are the immediate payment terms of an invoice?
Immediate payment terms include “Cash on Delivery (COD),” “Cash In Advance (CIA),” or “Cash With Order (CWO).” These terms mean the buyer must pay right away or before they receive the goods or services. This ensures the seller gets paid without any delays.
How do you tell customers about payment terms?
You can communicate payment terms by including them in the invoice, talking about them during negotiations, or putting them in your terms of sale. Always make sure to clearly explain the terms, due dates, and any penalties for late payments to avoid misunderstandings.
Conclusion
Understanding what are payment terms on an invoice is key to keeping your B2B business running smoothly. Payment terms explain when and how your customers need to pay, which helps you manage cash flow and avoid late payments.
In this guide, we’ve explained how payment terms on an invoice work, gone over the most common types and shared simple tips for choosing the best terms for your B2B business.
- What are payment terms on an invoice
- Types of payment terms
- How to choose the best payment terms for B2B
- Leverage on Wholesale Suite
Remember, the right payment terms are not just about getting paid—they are about creating a system that works for everyone involved. With proper planning and the use of helpful tools like Wholesale Suite, you can make your payment processes smooth, predictable, and beneficial for both your business and your customers.
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