It’s important for you and your customers to have a clear agreement on payment terms. Here's what you need to know about payment terms.

Why are payment terms so important?

If your business is of the type where customers always pay up before you give them the goods – such as a shop – you don’t have to worry too much about payment terms. However, if your business is one in which customers pay after you’ve provided goods or services, you’re providing them with credit, so it’s essential that you and your customers have an agreement about when they will pay you.

If you don’t have this type of agreement, you can get into real difficulties with cash flow. For example, if you’re paying your own suppliers and other bills within 30 days, but your customers take on average 60 days to pay you, you’re in trouble. Instead of paying your bills from your sales, you’ll need to bridge the gap by getting the money from elsewhere – e.g. as a loan or overdraft – which will cost you more money.

So, don’t just assume that your customers will pay up by a certain date – instead, agree terms before doing business with them.

Different industry sectors tend to have different payment terms. 30 days is pretty standard, but in some industries it can be more than double this. If you don’t agree on a payment date, the default period set by law is 60 days.

 

What are typical problems with payment terms?

The following scenarios give examples as what can happen when businesses chase late payments:

Scenario 1 - verbal agreements

Tradesperson: ‘When we first spoke about the work, we agreed that you’d pay me within 14 days of getting my invoice – it’s well over that now.’ Customer: ‘No, I distinctly remember we said 45 days – it’s nowhere near that yet.’

The trouble with verbal agreements is that if things get sticky there’s no solid evidence about what was said – it’s just your word against the customer’s.

Scenario 2 - be clear about payment due dates

Business person: ‘My invoice clearly states that payment is to made be within 21 days.’ Customer: ‘Yes, but you didn’t mention these terms when we placed the order.’

You can’t just spring your payment terms on the customer like this.

Scenario 3 - be clear about payment terms

Customer: ‘I’m aware that we haven’t paid your invoice within 30 days, but our own terms are 60 days.’ Business person: ‘I didn’t know that’. Customer: ‘It clearly states this on the purchase order we sent you.’

Generally speaking, the last written document in the communication chain dictates whose terms apply. So, in scenarios like this, if you haven’t reiterated your own terms after receiving the customer’s order, their terms trump yours!

Scenario 4 - don't bury important information

Customer: ‘It says 30 days in my payment terms.’ Business person: ‘Yes, can see that now but it’s buried in the middle of a lot of other text, and it’s in very small print. You can’t really blame me for not noticing it.’

If it comes to a legal dispute, a court might agree with the customer if they feel that you’ve not made your terms very obvious.

Scenario 5 - contracts

Business person: ‘I know the terms on your contract says 60 days, but I didn’t sign it and I’d like my payment now please.’ Customer: ‘But you did the work that was requested in the contract, so basically you’ve accepted our terms.’

If you carry out a job or deliver goods to the customer who’s presented you with a draft contract, even though you haven’t signed it, in some circumstances you might be deemed to have accepted it. This is called acceptance by conduct.

Scenario 6 - delays in payment

Business person: ‘You’ve always paid my invoices very promptly but now you’re saying it could take up to three months.’ Customer: ‘Sorry, but our new Head of Finance is insisting we stick more closely to our standard payment terms. You’ve been lucky that up until now we’ve been able to pay your invoices sooner than we’re obliged to.’

Even if you have a good existing relationship with a customer under whose payment terms you’ve been supplying goods or services, be aware that at any time they might enforce the terms more rigorously. Also they might change their terms so they take longer to pay in future, but for any invoices you’ve already raised they should stick to the previous arrangement.

What terminology do I need to be aware of?

Here is a list of commonly used payment terms and their meanings.

TermMeaning
Net monthly accountPayment is not due until the last day of the month following the one in which the invoice is dated. E.g if your invoice is dated 1 March, it's not due for payment until 30 April - i.e about two months.
15 MFIPayment is due on the 15th of the month following the invoice date.
EOMEnd of month.
Net 14Payment is due 14 days after the invoice date.
Net 30Payment is due 30 days after the invoice date.
Net 60Payment is due 60 days after the invoice date.
CODPayment to be provided as cash on delivery.
CNDPayment to be provided as cash on the next delivery.
CIAPayment to be provided as cash in advance.

What is retention of ‘title’?

Under The Sale of Goods Act 1979, a retention of title clause (also known as a Romalpa clause) states you continue to own goods you have supplied until you are paid. 

Having a retention of title clause in payment terms enables you to keep ownership of goods you’ve already supplied until they’ve been paid for. This means that if the customer doesn’t pay you, or they become insolvent, you can recover your goods that are still in the customer’s possession.

A basic retention of title clause states that goods sold do not pass to the buyer until the goods have been paid for in full. The clause state that the seller can enter the enter the customer's premises to recover the goods once payment becomes overdue and that goods should be easily identifiable and kept separate from goods belonging to third parties.  

This is a complex area and if you wish to incorporate this clause into a contract it is advisable to take legal advice. 

To find a local solicitor who can advise you on terms and conditions, go to The Law Society’s solicitor database.

Can I purchase a set of payment terms for use in my business?

If you search online you’ll find businesses who supply templates for terms and conditions, including payment terms.

If you purchase one of these and adapt it for your business it may be a good idea to ask a solicitor to check it over, or alternatively get the solicitor to write one for you; that way you can be sure the terms are designed for your specific needs.

To find a local solicitor who can advise you on terms and conditions, go to The Law Society’s solicitor database.

The Chartered Institute of Credit Management (CICM) has also created a useful guide on how to agree on payment terms with customers. Click the button below to download.  

Survey: What payments terms do you work to?

In your experience how many days do your customers generally take to pay you from the date of invoice? Select one option from the list below. 

This vote is not an opinion poll, but a way for you to compare your views with other small business owners.  

Next Steps

How should I chase customers for payment?

If you’ve tried doing everything you can to get your customer to pay your invoice, but they still don’t pay up, there are steps you can take as a last resort. Here are the key actions you should consider taking.

Read more

Setting your prices

Pricing your products or services can be very tricky. Setting prices too high will scare off customers, but pricing too low will throw away potential profits. Here’s what you need to know about this delicate balancing act.

Read more

Stay informed

Register or Login to add this article to your reading list.

Share this