Understanding Payment Terms

Payment terms dictate when you need to pay a bill or invoice completely. Essentially, payment terms outline when you need to make a payment, taking into account things like discounts and due dates. These help to manage the cash flow efficiently and establish clear expectations regarding financial transactions.

For example, 'NET 30' payment term indicates that the full payment is due within 30 days.

Payment Term Types

Payment terms are often denoted in a standardized format, typically comprising a combination of numbers and abbreviations. Let's break down some common payment terms:

Payment Term	Description
COD	COD, or Cash On Delivery term means that the payment is required at the time of delivery. If the payment is not made, the goods are not delivered.
CIA	CIA, or Cash In Advance term means that the payment must be made before goods or services are provided. This term is often used to reduce credit risk.
Net 30, Net 45, Net 60, Net 90, etc.	These payment terms dictate that the full payment must be made within 30, 45, 60, or 90 days, respectively.
2% Net 30	This payment term means that if the payment is made within 30 days, you receive a 2% discount.
2% 30 Net 60	This payment term means that if the payment is done within 30 days, you receive a 2% discount, and the full payment has to be made within 60 days.
FOLLOWING 25TH	This payment term dictates that the payment should be made by the 25th day of the month following the issue date. For example, if an invoice is issued on any day of April, the full payment would be due by May 25th.
2% 20 MONTH FOLLOWING	This payment term means that if the payment is done within 20 days after the next month from when you got the invoice or bill, you get a 2% discount. For example, if you got the bill in April, you'd need to pay by May 20th to get the discount. If you pay later, you don't get the discount, and you have to pay the full amount of the bill.