What Are Payment Terms? Common Invoice Terms Explained
Payment terms are the conditions a seller and buyer agree on for paying an invoice: when it's due, any discount for paying early, any deposit up front, and the charge for paying late. "Net 30", meaning the full amount is due 30 days after the invoice date, is a common example.
If a plumbing supply house prints "Net 30, 1.5% per month on past-due balances" on every invoice, the $2,400 of pipe and fittings your company buys on account on March 2 is due by April 1, and the late charge starts after that.
What payment terms cover
Payment terms often also name the accepted payment methods, such as ACH or check, and the address or account to pay.
"Net" means the full invoice amount with nothing taken off. So "net terms" is shorthand for buying now and paying the full amount later, a form of credit between businesses called trade credit. The supplier carries it as accounts receivable (money customers owe it), and you carry it as accounts payable (bills you owe). No interest is charged as long as you pay by the due date.
Terms usually appear on the invoice, but they hold up best when the customer agreed to them before the sale, in a signed quote, contract or credit application. An invoice that introduces a late fee for the first time gives the customer room to argue.
Common payment terms
These are the terms you'll see most often on business invoices:
| Term | What it means | Where it's common |
|---|---|---|
| Due on receipt | Pay as soon as the invoice arrives | Service calls, one-off customers |
| Net 10, 15, 30, 60 or 90 | Full amount due that many days after the invoice date | Supplier and trade accounts |
| 2/10 net 30 | 2% off if paid within 10 days, otherwise full amount in 30 | Suppliers who want cash sooner |
| Net 30 EOM | EOM means end of month: due 30 days after the end of the month the invoice is dated | Monthly statement billing |
| CIA or prepayment | Cash in advance, paid before work or shipping | New customers, custom orders |
| COD | Cash on delivery | Deliveries to new accounts |
| Deposit plus balance | Part up front, the rest on completion | Remodels, custom fabrication |
| Progress payments | Paid in stages as the work gets done, often with a share held back until the end | Construction |
The share held back on construction jobs is called retainage.
How the due date is counted
Most terms count calendar days from the invoice date, weekends included. Some contracts count from delivery or from the day the customer receives the invoice instead, so read the wording.
For sales of goods, the Uniform Commercial Code, a model law states adopt in their own versions (Louisiana skipped this part), fills the gaps. Under UCC section 2-310, unless the parties agreed otherwise, payment is due at the time and place the buyer is to receive the goods, after a chance to inspect them. If the seller ships on credit, the credit period starts at shipment, and post-dating the invoice or sending it late pushes the start back. Services and construction contracts follow other rules, mostly the contract itself.
The practical point for sellers: invoice the day the job is done. A plumber who finishes on the 1st but invoices on the 15th has stretched net 30 into 44 days of waiting, at their own cost.
How to choose payment terms for your customers
Start with what your customers expect. Commercial clients and general contractors often expect net 30. Homeowners usually expect to pay when the job is done, and a remodel may call for a deposit to cover materials ordered for that job.
Then look at your own cash cycle. If you pay crews weekly and suppliers on net 30, offering customers net 60 means you're financing the gap.
Take a landscaping company that bills $40,000 a month in commercial maintenance. If every customer pays on time on net 30 terms, about one month of billing, $40,000, is outstanding at any moment. Move everyone to net 60 and that roughly doubles to $80,000. The extra $40,000 has to come from somewhere, often a line of credit, a bank loan you draw on as needed. At an assumed 9% a year, that's $3,600 in interest annually ($40,000 x 0.09).
So longer terms are a price concession, and you should price them in. Shorter terms, deposits or prepayment make sense for new customers, customers who have paid late before and jobs with expensive materials you can't return.
Late fees and interest
A late fee is a charge for paying after the due date, usually a monthly percentage of the overdue balance or a flat amount. Put it in the signed agreement or credit application first, then repeat it on every invoice.
How much you can charge is a state law question, and the rules differ by state. States set limits on interest, and some set a default rate that applies when the contract names none. Check your state's rules, or ask your attorney, before you print a number.
A $7,800 invoice that's one month past due, at 1.5% per month, picks up a $117.00 late fee ($7,800 x 0.015). Over a full year, 1.5% a month comes to 18%, which is why the number deserves a legal check.
When the law sets the terms
If you sell to a federal agency, the Prompt Payment Act applies. Under 5 CFR 1315.4, as of October 2026, the agency pays on the date the contract sets or, if the contract names none and no early-payment discount or fast-pay method applies, 30 days after it receives a proper invoice, meaning one that includes every item the rules and the contract require.
The 30 days can't start before the seventh day after delivery or completion of the work. If the agency accepts the work sooner, the acceptance date replaces that seventh day, and if the contract sets a longer acceptance period, the clock waits for it. Some foods have shorter deadlines, such as 7 days after delivery for meat, fresh eggs and fish.
When a federal agency pays late under the Prompt Payment Act, it generally owes you interest without your having to ask for it. The Treasury resets the rate every six months: it is 4.75% for payments that become late between July 1 and December 31, 2026, so check the Treasury's rate table for later periods.
On federal construction contracts, FAR 52.232-27 (the January 2017 clause, still current in October 2026) requires the prime contractor, the company that holds the contract with the government, to promise its subcontractors payment for satisfactory work within 7 days of being paid for it, with an interest penalty if late.
The subcontract can still let the prime keep a set percentage of each progress payment as retainage, without cause and without owing that penalty. To withhold anything else without owing the penalty, the prime must send the subcontractor a written notice of the amount, the reason and the fix needed to get paid, with a copy to the contracting officer, the government official who manages the contract.
Some states have their own prompt pay laws for construction, with different deadlines, interest rates and exceptions. Texas, for example, gives an owner on a private project 35 days to pay a contractor's written payment request for properly performed work, and the contractor 7 days to pay its subcontractors, with room to withhold over a good-faith dispute. Your attorney or CPA can confirm which rules apply to your contracts.
Tracking payment terms in accounts payable
On the paying side, terms only help if they're recorded. In your accounting system, put each vendor's default terms on its vendor record and the actual terms on every bill, so due dates calculate themselves. Pay by due date, not by the order bills arrived. An AP aging report groups unpaid bills by how long they've been outstanding, which shows quickly which bills are already past due, and by how much.
Clyr's bill pay and accounts payable tools cover the paying side. Invoices arrive by email, Clyr extracts the line items, approvals follow your rules, and you pay by ACH or check. ACH and checks both take time to arrive, so schedule each payment early enough to land before the due date.
FAQs
When a supplier asks you to apply for net terms, it means applying to buy on account and pay later instead of paying at the counter. The application usually asks for business details and bank or trade references, and some ask the owner for a personal guarantee. Read the fine print before signing. It's often where the late fee, interest rate and collection costs are agreed, which makes them much easier for the supplier to enforce later.
Sometimes, depending on your state. Texas, for example, as of 2026, lets a creditor that never agreed on interest charge 6% a year on the amount owed, starting on the 30th day after it was due. Other states set different defaults or none at all. Relying on a default is a weak position, so the better fix is to put your late fee in writing for every customer from now on.
Yes, going forward. Tell the customer in writing before the change takes effect, and apply the new terms to new orders or invoices, not to bills already issued under the old ones. If a signed contract sets the terms, changing them needs the customer's agreement. Moving a slow payer from net 30 to a deposit plus balance on completion is a normal, reasonable step.
Then the customer has taken an unearned discount and still owes the difference. On a $5,000 invoice with 2/10 net 30 terms, a customer who pays $4,900 on day 18 still owes $100. You can leave that $100 open on the invoice or add it to the next statement, and whether to let a day or two slide for a good customer is your call. Your terms should say the discount counts from the invoice date and ends when the window closes.
