Accounting technology / Glossary / Payment terms

What are payment terms?

Definition

Payment terms are the conditions agreed between a seller and a buyer for paying an invoice: how many days the buyer has, from what date, by which method, and any discount for early payment or charge for late payment. A common example is net 30, meaning the full amount is due 30 days after the invoice date.

Also calledcredit termsinvoice termsnet terms

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Common term: Net 30
Early payment discount: For example 2/10 net 30
EU late payment interest: ECB rate plus 8 points

How payment terms work

Terms are set in the contract or order and printed on each invoice. Common forms are net 30 or net 60, due in a set number of days; end of month, such as 30 days end of month; due on receipt; payment in advance; and staged payments for projects. 2/10 net 30 offers a 2% discount if the buyer pays within 10 days, with the full amount due at 30. Longer terms help the buyer's working capital and cost the seller, which is why days sales outstanding and days payable outstanding are watched closely. In the EU, a business paid late by another business can charge statutory interest at the European Central Bank reference rate plus 8 percentage points and a flat €40 per late invoice; if no date was agreed, interest runs from 30 days after the invoice or delivery. The UK has similar rules with fixed sums of £40 to £100.

Common questions

What does net 30 mean?+

The full invoice amount is due within 30 days of the invoice date, or of delivery if the contract says so. Net 60 and net 90 work the same way with longer periods.

What does 2/10 net 30 mean?+

The buyer may take a 2% discount if it pays within 10 days; otherwise the full amount is due within 30 days. Giving up the discount is an expensive way for a buyer to finance 20 extra days.

What happens if no payment terms are agreed?+

In the EU and the UK, payment between businesses is treated as late 30 days after the buyer receives the invoice or the goods or services, whichever is later, and statutory interest can then be charged.