What Are Payment Terms?
Payment Terms

Every invoice answers the question "when do I have to pay this?", either explicitly or by default. Payment terms are that answer. They are part of the agreement between supplier and customer, ideally settled before the work starts, and repeated on every invoice. They decide a small business's cash flow more than almost anything else it controls.

Common payment terms

The invoice due date calculator turns any of these into a date for any invoice.

Days from invoice to due date, invoice dated 15 September

• Due on receipt0 days
• Net 77 days
• Net 1414 days
• End of month15 days
• Net 3030 days
• 20th of next month35 days
• 30 days EOM45 days
• Net 6060 days

What the law says

You can set your own terms. GOV.UK says businesses can set their own payment terms, such as discounts for early payment and payment upfront. The law then adds limits and a default:

• Agreed terms. An agreed payment date should usually be within 60 days for business transactions and within 30 days for public authorities. A longer period with a business is allowed only if it is fair to both.
• No agreed terms. A business customer's payment is late 30 days after it receives the invoice, or after you deliver the goods or provide the service, whichever is later.
• Late payment. Once a business customer's payment is late, you can claim statutory interest and late payment compensation, unless your contract sets its own remedy.

These rules cover business and public sector customers. For consumers, the terms you agree in the contract apply, and there is no statutory interest.

What payment terms usually include

Good payment terms cover more than a date:

• When. The term and the resulting due date.
• How. Bank transfer details, card or payment link, and the reference to quote.
• Deposits and stages. Any amount due before work starts, and any stage payments.
• Early payment discount. If you offer one, the percentage and the deadline.
• Late payment. That business customers will be charged statutory interest and compensation.

Choosing your terms

Match the term to the customer. Households can usually pay on completion or within 7 days. Small businesses manage 14 days. Established business customers with monthly payment runs are often best on 30 days, which fits their cycle. Large companies may insist on their own terms; up to 60 days is within the usual limit, and anything beyond must be fair to both sides. For a new customer or a large job, a deposit and stage payments reduce what you are owed at any one time. The guide on invoice payment terms sets out the options in detail, and 30 day payment terms covers the most common term.

Writing terms on an invoice

Write the term and the date it produces, for example "Payment due within 14 days, by 29 September". A date removes any argument about when the clock started and tells the customer's accounts team exactly which payment run to use. Add your payment details and the reference to quote.

Terms and cash flow

The longer your terms, the more money is tied up in unpaid invoices, your accounts receivable. A business invoicing £5,000 a month on 60-day terms has about £10,000 waiting to be paid at any time; on 14-day terms, around £2,300. Shorter terms, deposits and prompt chasing all free up cash. Where long terms cannot be avoided, some businesses use invoice finance to borrow against unpaid invoices, at a cost.

A worked example

A web developer agrees 14-day terms with a new client for a £3,000 project, with a 30% deposit before work starts. The deposit invoice, £900, is due on receipt. The final invoice, £2,100, is issued on 15 September and states "Payment due within 14 days, by 29 September". The client pays on 3 October, four days late. Because the client is a business, the developer could claim statutory interest for four days, about £2.70 at 11.75%, plus £70 compensation, and mentions it in a polite note; the client pays promptly next time.

Terms in the contract, not just the invoice

Payment terms are strongest when they are agreed before the work, in a quote the customer accepts, a written contract or an order confirmation. An invoice that announces terms the customer never agreed can still state a date, but it leaves room for argument, and larger customers will often simply apply their own standard terms. Put the same terms in three places: the quote, the confirmation and every invoice. If a customer's purchase order arrives with different terms, raise it before you accept the order, not after the invoice is late.

Early payment discounts

An early payment discount, such as 2% if paid within 7 days, can speed up payment, but it costs you the discount on every invoice paid early, which over a year can be more than the cost of waiting. If you offer one and you are VAT registered, VAT Notice 700 sets out two ways to handle the VAT: issue a credit note when the customer takes the discount, or put the discount terms on the invoice with a statement that the customer can only recover the VAT actually paid. Most small businesses find shorter terms and prompt reminders work better than discounts.

Typical terms by kind of business

These are common patterns, not rules. What matters is that your terms are agreed, written down and consistently applied.

Reviewing your terms

Once a year, compare each customer's terms with when they actually pay. A customer on 30 days who always pays on day 45 is really on 45; talk to them, add a reminder before each due date, ask for a deposit, or shorten the terms for new work. A customer who always pays on time has earned the terms they have. Regular review keeps your terms meaningful rather than decorative.

Common mistakes

• No terms at all. The 30-day default then applies to business customers, and nothing is agreed with households.
• Terms only as a number. "Net 30" without a date invites argument.
• One term for everyone. Different customers can meet different terms.
• Agreeing a customer's long terms without thinking. Check they are fair and within the usual limits.
• Not saying what happens if payment is late. Customers who know late payment costs them statutory interest and compensation pay on time more often.
• Never chasing. Terms mean little if the day after the due date passes without a reminder.

Payment terms for construction work

Construction has its own rhythm. Subcontractors are often paid monthly against applications for payment, with a percentage held back as a retention payment until the work is proven, and with CIS deductions taken from the labour. The payment terms in a construction contract usually set the valuation dates, the payment due dates, the retention percentage and the release dates. Read them before you sign, because the contract rather than your invoice decides when money arrives.

When the customer is a consumer

For household customers, the Late Payment Act does not apply, so there is no statutory default date and no statutory interest. That makes agreeing terms up front even more important. Say when payment is due, often on completion, and how. For larger jobs, take a deposit and stage payments. Put it in writing before you start, because a clear written price and payment arrangement is part of what the consumer relies on when deciding to go ahead.

Related terms

Payment terms set the due date from which statutory interest and late payment compensation run. They often appear first in a quotation or purchase order, and every invoice should repeat them. The late payment interest calculator shows what a late business payment costs the customer.

The short version

Agree your payment terms before the work, write them on every invoice as a date, keep business terms within 60 days and public sector terms within 30, and say what happens if payment is late. If you agree nothing, the law gives business customers 30 days from receipt or delivery. Everything else is detail that makes those basics work for each customer.

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