Payment terms

Definition

Payment terms set how long a customer has to settle an invoice, such as "net 30". Longer terms delay cash coming in, widening the gap between paying suppliers and being paid — the gap working capital has to fund.

Why it matters

Generous payment terms strain cash flow and lengthen your debtor days. Tightening them, or using finance to bridge, protects affordability. See improving cash flow.

In practice

For a small UK limited company, payment terms are rarely a single fixed policy — they drift deal by deal. A larger customer may insist on longer terms as a condition of doing business, while a smaller or newer customer might be offered shorter terms until trust is established. The director agreeing these terms is, in effect, setting how long the company's own cash stays tied up before it can be redeployed.

The knock-on effect shows up away from the invoice itself. Payroll, supplier payments and rent don't wait for a customer's terms to elapse, so a company that extends generous terms to win or keep a contract often has to find another way to bridge the resulting gap — whether that's tighter internal cash management, renegotiated supplier terms, or external finance.

How lenders read it

When a lender looks at a business, the payment terms it grants to customers say as much about risk as the invoices themselves. Very long or inconsistent terms across a customer book can signal that a company has limited negotiating power, or that its cash flow depends heavily on outstanding balances rather than cash in hand — both relevant to how comfortably it could service new borrowing.

Terms that are documented, consistently applied and backed by a clear collections process tend to read as a sign of a well-run finance function. Debtor days is the metric that turns stated payment terms into an observed outcome, and lenders typically weigh the two together rather than looking at either in isolation.