Invoice Payment Terms

Invoice payment terms dictate how and when suppliers get paid by their customers.

Lengthy payment terms or late payments are one of the main reasons that small to mid-sized suppliers face cash flow issues. Let’s look at what invoice payment terms are and how businesses can benefit from them.

What are invoice payment terms?

Invoice payment terms are contractual agreements outlining how and when buyers pay suppliers for the goods and services they purchase. These terms are a necessary part of successful buyer-supplier relationships and a supplier’s cash flow management strategy. Invoice payment terms typically cover:

• How buyers pay invoices. Effective payment terms make it as easy as possible for buyers to pay promptly, usually through digital payment options.
• When buyers pay invoices. Longer payment periods are becoming standard as buyers hold onto working capital during economic uncertainty. While 30-day terms (net 30) are standard, many buyers are negotiating net 90 or net 120 terms. Some payment terms may also require buyers to:
  • Provide full or partial payment in advance of the work. Suppliers may negotiate pre-payments if the buyer has a history of late payments.
  • Pay immediately upon receiving an invoice, especially if the invoice amount is small.
  • Pay suppliers in monthly or quarterly installments, which is common for large corporations.
  • Follow the payment laws and regulations specific to their region.
• What happens in late or non-payment scenarios. Buyers and suppliers often negotiate additional fees or suspension of services if buyers fail to pay within the agreed term.

For suppliers aiming to set win-win invoice payment terms, it’s best to analyze the business’s cash flow position first. This helps determine how flexible the payment terms can be while ensuring there’s enough cash flow to sustain and grow the business.

It’s also important to consider the standard payment terms within the industry, as well as to evaluate the buyer’s credit and payment history before discussing terms or starting any work. Early payment solutions, such as C2FO’s Early Payment program, can help mitigate longer payment terms from buyers that are unwilling to negotiate shorter terms. These programs facilitate early invoice payments from buyers in exchange for a small discount — one of the most cost-effective ways for suppliers to access working capital.

Invoice payment terms example

Imagine that Supplier A has negotiated 60-day payment terms with its new customer, Buyer B. Supplier A is struggling to maintain a healthy cash flow and wants to offer an early payment incentive to Buyer B on its first invoice. Its invoice payment terms might look like the following:

• Invoice Date: May 1, 2023
• Terms: Net 60
• Total Invoice Amount Due: $25,000
• Payment Due: June 30, 2023
• Accepted Payment Methods: Credit Card, Wire Transfer, Check
• Early Payment Offer: 2/10 Net 60*
• Late Payment Terms: Supplier A will charge a 1.5% late payment fee for payments received after June 30, 2023.

* These terms mean that if the buyer pays the invoice within 10 days, it will receive a 2% discount of $500. Otherwise, the full balance is due within 60 days.

Why are invoice payment terms important?

Invoice payment terms are important for a business’s cash flow and growth strategies. Even if a supplier lands a contract with a big customer, it may lack the working capital required to run and expand if the payment terms leave it waiting months for invoices to clear accounts receivable. Mutually-beneficial payment terms not only ensure that a supplier’s business can sustain the cash flow needed for growth investments — but they also help buyers receive goods on time and in full and minimize supply chain disruptions.

Establishing clear and thorough invoice payment terms is also crucial for maintaining healthy buyer-supplier relationships. This documentation ensures that a supplier has sound legal standing should a buyer’s payments go into default or other payment disputes happen.

The benefits of invoice payment terms

• Get paid faster. Negotiating shorter payment terms and leveraging early payment solutions help suppliers get paid earlier.
• Improve cash flow and grow. Terms that enable prompt payments can give suppliers the working capital needed to invest in R&D, purchase or lease new equipment, open new locations and access other growth opportunities.
• Protect the business. Effective invoice payment terms give suppliers sound legal standing in the event of a payment-related dispute.
• Improve buyer relations. Transparent payment terms help establish good communication and win-win business relationships between suppliers and buyers.

How C2FO can eliminate late payments

C2FO’s Early Payment program eliminates late payments by facilitating early payments between buyers and suppliers. Buyers that implement C2FO make all approved supplier invoices available for early payment — suppliers simply log in to review outstanding invoices, select which ones to accelerate, and choose a discount rate. This mutual participation enables suppliers to avoid late payments and boost cash flow on terms that benefit both parties.