Payment terms
The conditions a supplier sets for paying an invoice: when it is due, any discount for paying early and any charge for paying late.
In short
- Net 30 means the full amount is due 30 days after the invoice date.
- 2/10 net 30 adds a 2% discount for paying within 10 days.
- Terms are negotiable. Longer terms help the buyer's cash; shorter ones help the supplier's.
Payment terms tell a buyer when and how an invoice should be paid. They appear on the invoice and are usually agreed in advance, in a contract, a supplier agreement or the supplier's standard conditions.
Common terms
- Net 30, net 60: the full amount is due 30 or 60 days after the invoice date.
- 2/10 net 30: 2% off if paid within 10 days, otherwise due in 30.
- EOM or end of month: the clock starts at the end of the month the invoice is dated. "Net 30 EOM" on an invoice dated March 10 means due April 30.
- Due on receipt: payment is expected immediately.
- COD or CIA: cash on delivery, or cash in advance, often for new or higher-risk customers.
- Late payment interest: for example, 1.5% a month on overdue balances.
Why they matter to both sides
For the buyer, longer terms mean holding cash longer, which feeds days payable outstanding. For the supplier, shorter terms mean getting paid sooner, which lowers days sales outstanding. Terms are part of the price: a supplier who offers net 60 is effectively financing its customer for two months.
Terms only help if they are recorded correctly. An AP system that has the wrong terms for a supplier pays too early, too late or misses a discount.
Worked example
Reading three invoices
Three invoices are dated June 12. The first says net 30: due July 12. The second says 1/15 net 45: pay $9,900 by June 27 on a $10,000 invoice, or $10,000 by July 27. The third says net 30 EOM: due July 30, 30 days after the end of June.