Why Clear Payment Terms Are Your Cash Flow Lifeline
Invoice Payment Terms are the conditions, agreed upon by a buyer and a seller, that define when and how an invoice is to be paid. Without them, a client has no legal obligation to pay you by a specific date.
For freelancers and SMEs, ambiguous terms are the #1 cause of cash flow gaps. Changing your terms from "Payment due ASAP" (which is vague) to "Net 15" (which is specific) can reduce your average collection period by over 30%.
Visual Guide: Where to Put Terms on an Invoice
Payment terms should not be hidden in the fine print. They must be visible in two places:
- The Header: Near the Invoice Date and Due Date.
- The Footer: In the "Notes & Terms" section with specific banking details.
The Master Glossary: Payment Terms Defined
Using standard industry codes makes your business look professional. Here is the definitive list of terms you should know.
Net 7 / 10 / 30 / 60
Definition: The "Net" number represents the calendar days the client has to pay. "Net 30" means payment is due 30 days after the invoice date.
Best For: Standard B2B relationships. Net 30 is the industry standard. Net 60/90 is common for large corporations.
Due Upon Receipt
Definition: Payment is required the same day the invoice is received.
Best For: One-off projects, new clients, or service work (e.g., plumbing, repairs).
PIA (Payment in Advance)
Definition: 100% of the payment is required before any work begins or goods are shipped.
Best For: High-risk clients, bad credit history, or custom goods that cannot be resold.
CIA / COD
Definition: "Cash in Advance" or "Cash on Delivery".
Best For: Physical goods delivery where the driver collects payment.
EOM (End of Month)
Definition: Payment is due at the end of the month in which the invoice was sent.
Best For: Retainer clients where you bundle all work into a single monthly bill.
MFI (Month Following Invoice)
Definition: Payment is due on a specific date in the month following the invoice date (e.g., "15 MFI").
Best For: Recurring subscriptions or consistent supply chains.
Strategic Pricing: Early Payment Discounts (2/10 Net 30)
Want to get paid faster? Incentivize it. The term "2/10 Net 30" is a powerful tool for cash flow management.
How "2/10 Net 30" Works
- The Incentive: The client gets a 2% discount if they pay within 10 days.
- The Standard: Otherwise, the full amount (Net) is due in 30 days.
Example: On a $10,000 invoice, the client saves $200 by paying 20 days early. For you, getting $9,800 today is often worth more than chasing $10,000 next month.
The Math: How to Calculate Late Fees
Empty threats don't work. You need a policy and a formula. A standard late fee is 1.5% per month (approx 18% APR). Here is how to calculate it for your invoice.
Daily Interest Formula
Late Fee = (Invoice Amount × Annual Interest Rate) ÷ 365 × Days Overdue Example Scenario:
Invoice Amount: $5,000
Annual Rate: 10% (0.10)
Days Late: 30 Days
Calculation: ($5,000 × 0.10) ÷ 365 × 30 = $41.10 Late Fee
Note: Usury laws vary by state and country. Ensure your interest rate does not exceed the legal maximum in your jurisdiction.
Copy-Paste Collection Email Templates
Don't know what to say? Use these scripts to maintain professionalism while demanding payment.
📧 1. The Polite Nudge (1 Day Before Due)
Subject: Friendly Reminder: Invoice #12345 Due Tomorrow
Hi [Name],
Just a quick note to remind you that invoice #12345 for [Amount] is due tomorrow, [Date].
If you've already sent payment, please disregard this message. If not, you can pay via [Link/Method].
Thanks,
[Your Name]
📧 2. The Firm Reminder (7 Days Overdue)
Subject: OVERDUE: Invoice #12345 was due on [Date]
Hi [Name],
Our records show that we have not yet received payment for Invoice #12345, which is now 7 days overdue. I have re-attached the invoice for your convenience.
Please let me know if there is an issue with the payment process.
Regards,
[Your Name]
📧 3. The Late Fee Notice (30 Days Overdue)
Subject: URGENT: Payment Outstanding for Invoice #12345
Hi [Name],
This invoice is now 30 days past due. As per our agreed terms, a late fee of [Amount] has now been applied to your balance.
Please remit the total amount of [New Total] immediately to avoid further escalation.
Sincerely,
[Your Name]
Frequently Asked Questions
What is the most common payment term in B2B?
The most universally accepted term in Business-to-Business (B2B) transactions is **Net 30**. This means the client has 30 calendar days (including weekends) to pay the total amount. However, digital services often trend toward **Net 15** or **Due Upon Receipt**.
What does 2/10 Net 30 mean?
This is an incentive term. It means the full payment is due in 30 days (**Net 30**), but if the client pays within the first 10 days, they receive a **2% discount** on the total invoice amount.
Can I charge a late fee for an overdue invoice?
Yes, but it must be legally disclosed beforehand. You should state your late fee policy (e.g., '1.5% monthly interest on overdue balances') in your initial contract and clearly on every invoice footer.
Is 'Due Upon Receipt' rude?
No. It is standard practice for freelancers, digital goods, and immediate services. It simply sets the expectation that the work is done and payment is now active.