Payment Terms are the conditions agreed upon between a seller and a buyer about how and when payment will be made. These terms are more than just formalities; they form the foundation of a smooth and reliable business transaction.
Types of Payment Terms
Payment Terms can vary depending on the nature of the transaction and industry practices, as well as the business relationship. Below are the most common terms:
1. Timing of Payment
| Payment In Advance (PIA) | The buyer completes payment before the supplier delivers the goods or services |
| Cash On Delivery (COD) | The buyer makes payment upon delivery of goods |
| Invoice Payment (Net Terms) | The buyer receives the goods or services and then has a set number of days to pay |
| End Of Month (EOM) | Buyers must make payment by the end of the month in which the supplier issues an invoice |
| Prompt Payment Discount (PPD) | The supplier offers a discount for early payment, such as 2% off if the buyer pays within 10 days |
2. Method of Payment
Offering multiple payment options helps ensure quicker and smoother transactions:
- Bank transfer (common for larger payments)
- Credit or debit card
- PayPal or other digital wallets
- Direct Debit
- Cash or cheque (less common nowadays)
- Letter of Credit (mainly for international trade)
Why Payment Terms Matter and Communicating Them Clearly
Having well-defined payment terms benefits both the business and its clients in several ways:
- Clear expectations reduce confusion and help prevent misunderstandings or disagreements
- Knowing when to expect payments enables better financial planning and cash flow management
- Offering incentives for early payment can lead to faster payment and improved cash flow
- Requesting advance payments or using secure methods helps minimise the risk of non-payment, especially with new or high-risk clients
Additionally, follow these steps to avoid any confusion:
- Always include payment terms on invoices, contracts and order forms
- Use simple, easy-to-understand language
- Make due dates prominent, using bold or highlighted text
- Offer multiple payment methods for convenience
- Consider early payment discounts or clearly stated late fees
What Should Be on an Invoice?
An effective invoice should contain all the necessary information for prompt payment:
- Unique invoice number
- Business name, address and contact information
- Customer’s name and address
- Clear description of goods or services
- Invoice issue date and delivery date
- Total amount due, including VAT (if applicable)
- Payment due date and payment methods
For sole traders, include your name and a valid legal address.
For limited companies, use the full registered company name. If you list directors, include all of them.
Standard Payment Terms in the UK
By default, UK law provides a 30-day payment term starting from the latest of the invoice date, delivery date or date of acceptance. However, different terms can be agreed upon if they are fair and clearly written.
Common UK terms include:
| Net 7 | Payment due in 7 days |
| Net 30 | Payment due in 30 days |
| Net 60 | Payment due in 60 days |
| Net 90 | Payment due in 90 days |
| EOM | Payment by end of month |
| MFI | Payment due the following month |
For international clients, clarify expectations early as norms may vary significantly.
Legal Protections for Late Payments
When clients fail to pay on time, legal protections are available. The Late Payment of Commercial Debts (Interest) Act allows businesses to charge interest at 8% above the Bank of England base rate and to also add a fixed fee for debt recovery costs.
Businesses should use these measures as a last resort. Open communication is therefore usually more effective in resolving issues and maintaining good relationships.
Managing International Payment Terms
International transactions introduce complexities such as foreign currencies, local laws and varying business customs. Before confirming a deal, make sure to discuss:
- Preferred currency
- Bank fees and additional charges
- Local legal requirements
- Required documentation for shipping or customs
Protecting Against Chargebacks
Chargebacks occur when a customer reverses a payment through their card provider, usually due to disputes over non-delivery, faulty items or even suspected fraud.
To protect your business:
- Obtain authorisation via signature or PIN
- Use secure and verified online payment systems
- Provide detailed product descriptions and delivery confirmations
- Respond promptly to disputes with proper documentation
- Consider upfront payments or bank transfers for high-value or risky transactions
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK laws and regulations are subject to change. Please speak to a professional for advice tailored to your individual circumstances. Pi Credit Management accepts no responsibility for any issues arising from reliance on the information provided.