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One of the most essential parts of a business is the ability to perform a successful transaction (exchange a good or service for money) to sustain cash flow. Since invoice payment terms are used in b2b transactions, both parties act as payors and payees. Therefore, they need to consider both viewpoints on payment processing.

What are Payment Terms?

A payment term is a document that details how and when a buyer is required to pay for goods and services acquired from their supplier. This is a type of agreement that helps a seller set their expectations for payment. The document includes: when the client pays their supplier, what method of payment the supplier wants to be paid in and the punishments for a missed payment

Some of the components of an invoice payment term may include:

· Invoice date.

· Invoice number which helps to track invoices in order.

· The total amount due.

· Goods and services provided.

· Due date and payment period.

·  Discount on early payments.

· The approved Payment methods.

· Additional terms that were discussed during the sales process.

· The supplier's contact information.

Types of Payment Terms

1. Advance Payment

· Payment in Advance(PIA): This is when a supplier requires the full amount before goods can be sold or services provided.  It can also be referred to as Cash in advance(CIA) or Cash with Order (CWO).

· Cash Next Delivery (CND): This is a type of agreement made where payment must be made before the next delivery is commenced or before the next product is shipped. Also known as Cash Before Shipment (CBS).

· 50% upfront: This is a type of agreement commonly used in long-term ventures where half of the total amount due is paid in advance. This enables both parties to take on equal monetary risk.

2. Immediate Payment

· Cash on Delivery (COD): This is an immediate type of payment.  This is the type of payment due immediately after goods or services are delivered. In this case, The supplier has a right to claim goods if the buyer doesn't pay immediately.

3. Dated Payment

· Net Payment: This usually appears as Net 7 or N7, Net10, 30, 60 or 90(N10, 30 etc). These numbers indicate the number of days the client is given to pay the amount due (net payment after any discount). This means that a Net 30/ N30 payments term invoice would be paid 30 days after the invoice date.

· End of Month(EOM)/Month following the invoice date(MFI): The EOM payment term requires payment at the end of the month (the last day of the month the invoice was issued). The MFI on the other hand is used for payment expected the month following the invoice date, usually on the 15th or 21st day.

4. Partial Payment

· Stage Payment: This term offers clients the opportunity to pay in instalments over a long period. Payments can also be made in parts after the delivery of certain products or the conclusion of a portion of a project.

5. Discounts

· Early Payment Discount: This term offers the buyer a percentage discount if they pay a certain period before the net payment period. E.g 2% 10 Net 30 or 2/10 net 30 means that the customer gets a 2% discount from the supplier if they pay within ten days from the date of purchase rather than taking the full 30 days credit.

· Accumulation discount: This term offers a buyer a discount for goods bought in large quantities. They are also known as Cumulative quantity discounts.

· Partial Payment Discount: When a supplier is suffering from low cash flow, they sometimes give their clients this payment term. The client is asked to pay a certain percentage of the amount due before goods are sold or services are provided. This might involve goods or services that require external costs outside the control of the supplier. This prevents the supplier from any out-of-pocket expenses and ensures payment from the client.

Factors to consider when determining the terms of payment

Before a supplier decides on the terms of payment that they would provide to their clients, they are certain things they need to consider. Some include:

· The total amount customers will owe your business in a given period.

· Cash flow: Consider the present financial situation of the business.  

· Goals: The current plan for the business.

· The credibility of the client and their payment history.

· The standard term of payment for your industry.

·  The counter offers of your competitors.

Ways to improve your payment terms

· Use the best methods to receive payments so that your clients find it easy to pay you.

· Offer decent incentives to customers for early payments.

· Ensure that you and your client are in total agreement. Make the terms clear from the get-go.

· Be reasonable and considerate in your transactions.

· Ensure you state the penalties for late payment. Let the document clearly state what happens if a client misses a payment or refuses to honour the agreement.

· Occasionally, take records and let go of customers who tend to consistently pay you late and most reliable and ethical customers.

· Go with the trend. Use technology to fill invoices online and send them via email. This makes it easier and faster. It also makes them lasting and less prone to getting lost. You can create and send free e-invoices on Bridger.

What is the role of Bridger in all of these?

One of the major challenges that suppliers tend to endure is the late or unpaid payment of invoices, especially for small businesses. This causes a restriction on cash flow. Also, there is a chance that a supplier is in dire need of cash before the due date of payment.

In situations like this, Bridger offers you the option of Invoice Financing. Invoice financing is a way for businesses to borrow money against the amounts due from clients.

Want to learn about Bridger's invoice financing, read our article here.

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Final takeaways

With the right Payment terms and structure, Merchants can significantly improve the cashflow and health of their businesses. However, all of that requires a certain amount of internal strategy and prioritization ahead of time. And while there is no one-size-fits-all, you can identify the must-haves and the must-not-haves early on for your payments, to set your business up for success.

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