The Short Answer

What Are Payment Terms?

Payment terms are the conditions a seller sets for being paid: how long the buyer has to pay, any discount for paying early, and any penalty for paying late. Net 30 means full payment is due within 30 days of the invoice date.

Waiting Too Long to Get Paid?

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In Plain English

The Rules for When You Get Paid

Payment terms are the rules on your invoice for when the customer has to pay you.

Net terms sound harmless until payroll is due before the check arrives. The longer your terms, the longer you are funding your customer’s business with your cash.

A Real-World Example

The Cleaning Company That Gave Everyone Net 60

Illustrative example

A commercial cleaning company in St. Louis, Missouri gives every client net 60 because one big client asked for it once. Payroll runs every two weeks. The owner starts putting payroll on a credit card.

She moves new clients to net 15 and keeps net 30 only for the large contract. Within two months, she stops borrowing to make payroll. Any cleaning company with a payroll-heavy cost structure should set terms this way.

From Dr. Paul’s Fabled Forest

Cal the Camel Pays on Time. His Customers Don’t.

Doctor Owl was at the farmers market filling a basket with pears when Cal the Camel plodded up, his long, patient face even longer than usual.

“Everyone at Cal’s Caravan Trading Post pays whenever,” Cal said. “I can’t say no. If you need it, I’ve got it.”

“When do you pay your own suppliers?” Doctor Owl asked.

“Every new moon,” Cal said. “On the dot.”

Doctor Owl handed him a pear. “So you pay on time, and you let everyone else pay whenever. Who is funding whom?”

That afternoon, Cal hung a small sign at the counter. It had a few words and a date: Payment due in two weeks. Then he went home and practiced saying it in the mirror.

Just one of many stories from Book 2 of Dr. Paul’s Fabled Forest Business School Series.

Dr. Paul’s Insight

Dr. Paul often finds that the owner’s payment terms are longer than the terms the owner’s own suppliers give them.

Put It to Work

Common Payment Terms

Match the term to the customer, not the other way around.

TermWhat it meansGood fit
Due on receiptPay nowSmall jobs, new customers
Net 15Due in 15 daysMost service businesses
Net 30Due in 30 daysEstablished business clients
2/10 net 302 percent off if paid in 10 days, otherwise due in 30Clients who can pay fast
50 percent deposit, balance on completionSplit paymentProjects and events

Watch Out

Pitfalls When Setting Payment Terms

Watch OutOffering longer terms than you receive

If you pay suppliers in 15 days and collect in 60, you are the bank.

Watch OutGiving every client the same terms

One big client’s terms should not become everyone’s terms.

Watch OutNo late fee or follow-up schedule

Without a plan for late payers, late becomes normal.

Watch OutTerms that are not on the invoice

If the customer cannot see the due date, they cannot meet it.

Why It Matters

Benefits of Clear Payment Terms

  • Faster cash
  • Fewer awkward money talks
  • Better cash flow forecasts
  • Less need for short-term borrowing

In Your Business Plan

How Payment Terms Shows Up in a Business Plan

Lenders read payment terms as a working capital question: how long is cash tied up in unpaid invoices?

Sample plan excerpt: Financial Plan, Working Capital Assumptions

“Residential clients pay on completion; commercial clients pay net 15, with the anchor contract at net 30. Accounts receivable are projected at an average of 18 days of sales.”

Keep Learning

Related Lessons

Chapter 12How to Get Customers to Pay on Time GlossarySmall Business Accounting and Finance Glossary GuideSmall Business Accounting and Finance: 20 Foundations TermHow to Write an Invoice That Gets Paid TermHow Much Deposit Should You Require? GuideThe 13-Week Cash Flow Forecast

FAQ

Questions Owners Ask About Payment Terms

What does net 30 mean?
Net 30 means the customer must pay the full amount within 30 days of the invoice date. Net 15 and net 60 work the same way with 15 or 60 days.
Should a small business offer net 30?
Only if your cash can handle the wait. Many small businesses do better with due on receipt or net 15, and save net 30 for established clients whose size or reliability makes the wait worth it.
What is 2/10 net 30?
It means the customer can take 2 percent off if they pay within 10 days. Otherwise the full amount is due in 30 days. It can speed up cash, but the discount comes out of your margin, so check the cost first.

More From the Series

Keep Building Your Business

Every book in Dr. Paul’s Fabled Forest Business School Series teaches one subject through short stories, real terms, and one-page worksheets.

Sales for Small Businesses book coverBook 5Sales for Small BusinessesGet it on Amazon → Management and Leadership for Small Businesses book coverBook 1Management and Leadership for Small BusinessesGet it on Amazon → Operations for Small Businesses book coverBook 3Operations for Small BusinessesGet it on Amazon →

Dr. Paul Borosky, DBA, MBA

Dr. Paul is a business consultant and author with 14+ years of experience and 1,000+ written business plans. He works with owner-run small businesses on plans, financial projections, and the systems that let a business run without the owner doing everything. This page is part of the glossary for Accounting and Finance for Small Businesses, Book 2 of Dr. Paul’s Fabled Forest Business School Series.

This page is for general educational purposes only. It is not tax, legal, accounting, or other professional advice. For decisions about your own business, consult a qualified professional.