Payment terms

Late payments cost businesses millions every year. With 3 in every 4 companies experiencing delayed B2B payments and bad debts averaging 8% of all credit sales, understanding payment terms isn't just good practice—it's essential for survival.

Payment terms are specifications of amounts owed, how, when, and where payments are due on sales transactions between sellers and buyers. They include the amount, invoice date, payment methods, early payment discount percentage, penalties, and due dates.

What are Payment Terms?

Payment terms refer to the conditions under which a seller will complete a sale. These terms specify when payments are due, what methods are acceptable, any discounts for early payment, and penalties for late payment. Payment terms from a contract or purchase order are included on an invoice to the customer.

Although payment terms may be negotiated, often the seller sets payment terms for routine sales transactions. They serve as a contract between buyer and seller, establishing clear expectations for when and how payment should be made.

Information Included in Payment Terms

Payment terms cover the who, when, where, what, and how of payment processing:

Essential Components

• Invoice amount: Total amount due
• Invoice date: Starting point for payment calculations
• Payment due date: When payment must be received
• Accepted payment methods: How payment can be made (ACH, wire, check, credit card)
• Early payment discounts: Incentives for paying early
• Late payment penalties: Fees for overdue payments
• Where to pay: Payment address, online portal, or banking details

Additional Terms

• Payment timing specifications (Net 30, Net 60, etc.)
• Discount terms (2/10 Net 30)
• International payment methods for global transactions
• Currency specifications for multi-currency deals
• Partial payment conditions

Common Types of Payment Terms

Net Payment Terms

Net 30: Payment due within 30 days of invoice date

• Most common B2B payment term
• No early payment discount offered
• Industry standard for established customers

Net 60/Net 90: Extended payment periods

• Used for larger transactions or trusted customers
• Net 60: Payment due within 60 days
• Net 90: Payment due within 90 days

Cash Payment Terms

COD (Cash on Delivery): Payment made when goods are delivered

• Eliminates credit risk for sellers
• Common for new customers or high-risk transactions
• Essentially Net 0 payment terms

CIA (Cash in Advance): Payment before shipment

• Lowest risk method for sellers
• Required for international transactions or new customers
• Ensures payment before goods exchange hands

CBS (Cash Before Shipment): Payment required before goods are shipped

• Similar to CIA but may allow ordering before payment
• Common in manufacturing or custom orders

Early Payment Discount Terms

2/10 Net 30: 2% discount if paid within 10 days, otherwise full payment due in 30 days

• Encourages faster payment
• 2% discount for paying 20 days early equals 36.5% annualized return
• Most common early payment discount structure

1/15 Net 45: 1% discount if paid within 15 days, otherwise full payment due in 45 days

• Lower discount percentage but longer early payment window
• Suitable for larger transactions where even 1% represents significant savings

Specialized Payment Terms

EOM (End of Month): Payment due by end of the month invoice was issued

• Simplifies payment scheduling for buyers
• All invoices in a month have same due date

MFI (Month Following Invoice): Payment due specific day of following month

• Example: 20 MFI means payment due 20th of month following invoice
• Provides consistent payment scheduling

Payment Terms Statistics

The payment landscape shows significant challenges and opportunities:

Late Payment Impact:

• 73% of companies experience delays in receiving B2B payments (Upflow)
• Bad debts average 8% of all B2B credit sales in the US (Atradius)
• 50% of all B2B invoices are currently overdue (Atradius)

Payment Methods Evolution:

• Paper checks dropped from 80% of B2B payments in 2004 to 33% in 2022 (AvidXchange)
• Only 8% of organizations now use checks most often to pay suppliers (AvidXchange)
• 76% of organizations experienced payment fraud in 2023, with checks comprising the largest share (AvidXchange)

Global Payment Terms:

• Payment terms in Western Europe now average 52 days (Upflow)
• 41% of European companies posted payment terms above 60 days (Allianz Trade)
• Working capital requirements reached 76 days of turnover globally in Q4 2023 (Allianz Trade)

Benefits of Clear Payment Terms

For Sellers

Cash Flow Management: Clear payment terms enable accurate cash flow forecasting and budgeting. Knowing when payments are due helps businesses plan operations, investments, and supplier payments.

Risk Reduction: Well-defined terms reduce the risk of non-payment by establishing legal obligations and consequences for late payment.

Relationship Management: Transparent terms build trust with customers and reduce disputes over payment expectations.

Early Payment Incentives: Discount terms like 2/10 Net 30 can accelerate cash flow while providing value to customers.

For Buyers

Budget Planning: Known payment deadlines help buyers schedule cash outflows and manage working capital effectively.

Cost Savings: Early payment discounts can provide significant savings—a 2% discount for paying 20 days early represents a 36.5% annualized return.

Supplier Relationships: Adhering to agreed payment terms builds credibility and may lead to better pricing or preferential treatment.

Operational Efficiency: Clear terms reduce administrative overhead in accounts payable processes.

Setting Effective Payment Terms

Factors to Consider

Industry Standards: Research typical payment terms in your industry to remain competitive while protecting cash flow.

Customer Creditworthiness: Adjust terms based on customer credit history and financial stability.

Transaction Size: Larger transactions may warrant extended terms or require cash in advance.

Geographic Considerations: International transactions often require different terms due to currency and regulatory factors.

Best Practices

Clarity and Specificity: Use clear, unambiguous language that leaves no room for interpretation.

Consistent Application: Apply terms consistently across similar customers to avoid confusion and disputes.

Regular Review: Periodically assess and update payment terms based on market conditions and business needs.

Integration with Systems: Ensure payment terms are properly reflected in accounting and ERP systems for automated processing.

Payment Terms and Automation

Modern businesses are increasingly automating payment term management:

Automated Invoice Processing

• Electronic invoicing with embedded payment terms
• Automatic calculation of due dates and discounts
• Integration with accounting systems for seamless processing

Payment Method Optimization

• Electronic payments reducing processing time and costs
• Real-time payment capabilities for immediate settlement
• Virtual cards and digital wallets for enhanced security

Exception Management

• Automated alerts for approaching due dates
• Escalation procedures for overdue payments
• Customer communication automation for payment reminders

Mysa transforms traditional accounts payable workflows through intelligent automation designed specifically for Indian businesses:

Automated Invoice Processing

• AI-powered OCR for instant invoice capture
• Automatic GST and TDS validation
• Intelligent data extraction and coding
• Real-time duplicate detection

Smart Approval Workflows

• Customizable approval rules based on amount, vendor, or department
• Mobile-enabled approvals for remote accessibility
• Automated escalation and reminder systems
• Multi-level approval support

Integrated Payment Processing

• Automated vendor verification across 700+ banks
• Smart payment routing (IMPS, NEFT, RTGS)
• Real-time payment tracking and notifications
• Automatic reconciliation with bank statements

Compliance and Audit Support

• Built-in GST compliance and TDS management
• Complete audit trails for all transactions
• Automated regulatory reporting
• Fraud detection and prevention

Key Benefits:

• Reduce invoice processing time from days to minutes
• Eliminate manual data entry and errors
• Ensure 100% GST and regulatory compliance
• Improve vendor relationships through faster payments
• Gain real-time visibility into AP operations

Mysa For Accounts Payable and Invoice Automation

Mysa transforms traditional accounts payable workflows through intelligent automation designed specifically for Indian businesses:

Automated Invoice Processing

• AI-powered OCR for instant invoice capture
• Automatic GST and TDS validation
• Intelligent data extraction and coding
• Real-time duplicate detection

Smart Approval Workflows

• Customizable approval rules based on amount, vendor, or department
• Mobile-enabled approvals for remote accessibility
• Automated escalation and reminder systems
• Multi-level approval support

Integrated Payment Processing

• Automated vendor verification across 700+ banks
• Smart payment routing (IMPS, NEFT, RTGS)
• Real-time payment tracking and notifications
• Automatic reconciliation with bank statements

Compliance and Audit Support

• Built-in GST compliance and TDS management
• Complete audit trails for all transactions
• Automated regulatory reporting
• Fraud detection and prevention

Key Benefits:

• Reduce invoice processing time from days to minutes
• Eliminate manual data entry and errors
• Ensure 100% GST and regulatory compliance
• Improve vendor relationships through faster payments
• Gain real-time visibility into AP operations

Transform your accounts payable workflow from manual complexity to automated precision with Mysa's comprehensive solution.

Common Payment Terms Challenges

Late Payment Issues

• Administrative burden of chasing overdue payments
• Cash flow disruption affecting business operations
• Relationship strain with chronically late-paying customers
• Legal costs associated with debt collection

Payment Method Limitations

• Security risks with traditional payment methods like checks
• High processing costs for certain payment types
• Limited payment options affecting customer satisfaction
• Currency conversion complexities in international trade

Technology Integration

• Manual payment term management leading to errors
• Lack of automation in discount calculation and application
• Poor integration between invoicing and payment systems
• Limited visibility into payment status and aging

Conclusion

Payment terms serve as the foundation of successful business relationships, directly impacting cash flow, customer satisfaction, and operational efficiency. As businesses face increasing pressure from late payments—with 73% experiencing delays and bad debts averaging 8% of credit sales—the importance of well-structured, clearly communicated payment terms cannot be overstated.

The evolution from traditional payment methods to digital solutions offers unprecedented opportunities for optimization. Early payment discounts providing 36.5% annualized returns, real-time payment capabilities, and automated term management are transforming how businesses approach payment relationships.

Success in payment terms management requires balancing competitive market demands with cash flow protection, leveraging technology for automation and compliance, and maintaining flexibility to adapt to changing business conditions.

Ready to revolutionize your payment terms management? Book a demo with Mysa today and discover how our intelligent automation platform can optimize your payment terms, accelerate collections, and ensure complete compliance while building stronger customer relationships.