Last Updated on November 17, 2021
As a new business owner, it’s a good idea to understand the different invoice payment terms that are out there before you set up your invoicing system. For example, you wouldn’t want to be sending an invoice with a due date that is too early and risk having it returned, or one with dates that are too late and have it rejected because it was overdue. This post will cover some of the most common types of invoices payment terms and look at how they work.
Payment in advance, or PIA, is an invoice term where the client pays for your service or product upfront before you provide it. Freelancers, self-employed consultants, and other independent contractors who are often paid at the beginning of a project or once they meet specific milestones use this payment term. It lets them know exactly how much money they’ll receive, even if their work takes longer than expected.
With a standard Net 7 invoice, the business receives payment within seven days of the invoice date. If you supply a service or product, this payment term means that the client would typically receive your invoice and pay it within seven days. This can vary depending on the industry and contract you have agreed with your client.
This term is used by retailers with large overheads who need time to manage their cash flow before paying. It gives them more flexibility than Net 3 or Net 5 terms, requiring payment within three or five working days.
A standard Net 10 invoice gets paid within ten working days of the invoice date. The only difference between Net 10 and other timed invoice payment terms is the time difference. Any business can use a Net 10 payment term.
With a standard Net 30 Payment Term, the business is paid 30 calendar days after the invoice date. If you must supply a service or product, this payment term means that your client would typically receive your invoice and pay it after 30 days. Businesses with large overheads which need time to manage their cash flow before paying invoices will often use this payment method.
A Net 60 payment term usually means that the due date for payment of an invoice falls 60 calendar days after the date on the invoice. When you supply a service or product, this payment term means that your client would typically receive your invoice and pay it within 60 days.
The extended time allows your clients more flexibility than Net 30 terms while still giving them enough time to manage their cash flow effectively. The most typical types of business that use Net 60 are manufacturing companies, charities, or organizations that are 100% business funded.
With a Net 90 Payment Term, the business is paid 90 calendar days after the invoice date. If you must supply a service or product, this means that your client would typically receive your invoice and pay it after 90 days.
This payment term is for businesses who need time to manage their cash flow and can offer finance options to smaller businesses so that they can handle any cash constraints while waiting for payment. Charities and public sector entities such as local authorities and government agencies often use it.
Businesses with longer payment terms (Net 60-90) often turn to invoice factoring to boost cash flow.
An End of Month (EOM) invoice is typically paid at the end of each month or when a contract finishes. This allows you to invoice your clients once per month rather than every two weeks, which can be more convenient for both parties. If you supply a service, the EOM payment term means that payment for this service gets collected at the end of each month.
It’s typical to use this invoice term when you’re supplying a product as well as a service. In other words, if your client contracts you to produce monthly financial statements and reports as an accountant or website content as a freelancer, it’s common practice to issue an End of Month invoice.
Finally, with a Standard 21 MFI payment term, the business is paid within 21 days of receiving your approved purchase order. With this invoice term, payment occurs once you’ve both gone through and agreed to an order before production begins. This date typically falls seven days after you issue a purchase order or once work has started on that particular project.
If you supply a service, the client will receive your invoice only after they have approved and signed off on the materials you’re providing them with. But, again, this can vary depending on the industry and contract you have agreed with your client.
Your clients can’t pay before receiving all necessary information and materials, so it’s essential to keep track of any working days lost for delivery if they don’t meet the 21 MFI payment term. Clients might try to renegotiate these terms if they don’t receive their materials on time, but a business owner should avoid this at all costs.
A Professional Payment Due (PPD) payment term varies depending on your country and your industry. In general, you can use a PPD when you work with larger companies that want to pay invoices over some time rather than paying all invoices within 14 days of receiving them.
However, the exact time allowed for a PPD can vary from 35-45 days between invoice date and due date, so ensure you find out the specifics of each contract before signing it.
As you can see, there are many different payment terms available depending on the type of industry you’re working in and the client’s company preference. So, before issuing an invoice, make sure you find out which term your clients use so they can receive your invoice promptly without unnecessary hold-ups.
Grey was previously the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helped businesses find the information they needed to make informed decisions about invoice factoring and A/R financing.