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2023-06-07

What are payment terms? Everything you need to know to get paid faster

our business depends on customers making payments for the products and services they receive. Setting clear payment terms and processes helps businesses get paid on time consistently and avoid cash flow issues before they’re a problem.

Sending invoices and collecting payments might seem straightforward, but most businesses will deal with late or missed payments at some point. When missed payments pile up, it can lead to major problems for your business and its future. In this article, we’ll answer payment questions like: 

  • What payment terms should you include on your invoices? 
  • How do payment terms impact your company and your customer experience? 
  • What can you do to make collecting payments easier?

Learn how to set more effective payment terms for your business and more below. 

Table of contents 

What are invoice payment terms? 

Invoice payment terms are the rules you set for how and when your customers pay for your products and services. Most payment terms set a specific due date for when customers or clients must pay an invoice. They also include clear instructions for how to pay and the consequences of what happens when someone doesn’t pay after a set number of days. 

Businesses with clear invoicing processes, including payment terms, have fewer late payments and better cash flow management.

Why every business needs payment terms 

No matter what type of business you run or whether you sell products or services, you need clear payment terms. Without them, your business is at high risk of losing money on missed or late payments. 

Even with clear payment terms, many customers pay late. Here are some shocking statistics:

  • A recent study found that large businesses in Australia pay about 53% of small-to-medium (SMB) invoices late. 
  • About 82% of failed small businesses cite cash flow issues as the primary reason they closed their doors. 
  • Late payments cost Australian businesses about $1.1 billion each year. 
  • Recent findings suggest businesses waited a full week longer (from 31 to 38 days) to pay invoices in July of 2022 than in January of that same year. Growing payment delays could continue with tougher economic conditions. 

Late payments ultimately cost businesses in the long run. After all, cash flow issues mean you can’t grow as quickly, generate as much revenue, or at worst, keep the lights on. 

For these reasons, it’s also helpful to work with an accounts receivable service like Visory. Chasing down unpaid invoices is one of the least favorite parts of running a business. By outsourcing your accounts receivable, you won’t have to. Visory can also help you set better payment terms and processes to prevent more unpaid invoices from happening. 

Benefits of payment terms

Beyond avoiding late or missed payments, there are many benefits of having clear payment terms. When invoices are paid on time, it helps your business show:

  • Better cash flow for growth: On-time payments give you a clear picture of how much money you have to invest back into your business. 
  • How well you manage your business: Consistent payments are a key performance indicator (KPI) of how well you manage your company finances.
  • Creditworthiness: You’ll know what you need from suppliers and how much cash you have on hand, which can help you get loans or other funding.

What should your invoice payment terms include? 

Your business is unique, so your invoice probably looks a little different from other companies. However, invoice payment terms have consistent elements no matter the business. 

Invoices usually include basic company information like: 

  • Invoice number to track each invoice
  • Business name, registration details and address
  • The date you issued the invoice 
  • Invoice total