A woman sits at a desk in a storage room, writing in a notebook with one hand while typing on a calculator with the other. The woman has long dark hair and is wearing a dark teal blouse. Behind her are metal shelving units filled with cardboard boxes.
Whether you're receiving payments or paying someone else, accounting tools can help you navigate tracking and following up on the terms of your business's payments. — Getty Images/Antonio_Diaz

When, how, and where you get paid directly affects cash flow and financial health. In accounting, payment term strategies help small businesses collect funds faster, streamline operations, and build customer loyalty. Explore common payment terms and how to use them to strengthen your business.

What are payment terms?

Payment terms define how and when a seller receives payment for products or services. They include due dates, accepted payment methods, early payment discounts, and late fees. Accounting payment terms affect accounts receivable, accounts payable, and financial reporting, making them vital for cash flow management.

Different types of payment terms used by small businesses

Small businesses use various strategies to balance cash flow and encourage timely payments. They can also tailor terms based on invoice size, industry norms, or client history.

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Here are some common types of payment terms:

  • Advance payment: An upfront payment must be made before the delivery of goods or services.
  • Cash before shipment (CBS): The customer prepays before the order is shipped.
  • Cash in advance (CIA): Referring to a sale that requires full payment before production begins.
  • Cash next delivery (CND): Customers must pay in full before their next scheduled delivery.
  • Cash on delivery (COD): Payment is collected when delivering the products or services.
  • Cash with order (CWO): Customers pay at the point of sale, like e-commerce payments.
  • Deferred payment: Buyers delay the payment to a future date, sometimes with interest.
  • End of month (EOM): The amount is due on the last day of the month the invoice was issued.
  • Net 7/10/30/60/90: Net terms establish how many days from the invoice date that payment is due.
  • Open account: Allows clients to buy on credit with pre-agreed terms.
  • Progress payments: Payments made for work completed at specific intervals.
  • Rebate: A partial refund is sent to the customer after the seller receives full payment.
  • Recurring billing: Automated invoicing and payments on a set schedule, commonly used subscription or membership models.
  • Upon receipt: This invoicing term means payment is due when the customer receives the invoice.
  • Xth month following invoice (X MFI): Payment is due on a specific day (X) of the month after the invoice was issued. For example, a client gets an invoice in March stating 28 MFI, meaning payment is due April 28th.
  • Y/Z net X: This is an early payment discount incentive, like 2/10 net 30. In this example, the customer gets a 2% discount if they pay within 10 days, or the full payment is due in 30 days.

Incentives and discounts are payment term strategies to enhance small business cash flow.

How to set effective terms and payment strategies

Consider industry standards, customer preferences, and cash flow forecasts when setting payment terms. According to SCORE, an efficient accounts payable process includes standardizing terms, handling disputes, and analyzing payment data.

Set clear, simple payment policies

Transparent payment terms improve cash flow and make overdue collections from B2B and B2C customers easier. Use simple, direct language on invoices, contracts, and websites to avoid confusion. In addition, ensure that anyone handling customer communication knows how to explain the payment terms and answer questions.

Automate accounting receivable tasks

With business automation, you can consistently enforce your payment term strategies with less manual effort.

Use accounting tools to automate the following tasks:

Align payment terms with your cash flow needs

Analyze your cash flow statements to identify slow periods. Then, adjust customer terms or negotiate vendor payment terms to maintain stability. For instance, you can offer shorter terms to clients while requesting extended payment terms from vendors. This could bring cash in quicker while delaying outgoing expenses.

Consider invoice size when setting contract payment terms

For large B2B invoices, define payment conditions based on risk. If a project’s failure means your team won’t get paid, require advance payment. Alternatively, you could offer flexible terms to reliable clients while requiring upfront payments or progress payments from new or high-risk customers.

Use incentives and penalties strategically

Incentives and discounts are payment term strategies to enhance small business cash flow. Offering 2/10 net 30 encourages early payments. Meanwhile, late fees or interest charges deter overdue payments. Balancing these strategies protects revenue and enhances financial stability.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

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