Payment terms

Definition

Payment terms state when and how an invoice must be paid — commonly net 30 (30 days from invoice), plus any early-settlement discount or late-payment interest clause.

In plain terms

Long terms win business but drain cash; short terms protect cash but can cost you the sale. The right answer depends on how much working capital you can afford to lend your customers for free.

Why it matters for your company

Halving standard terms from net 60 to net 30 can permanently free a large slice of working capital. If a big customer demands long terms, price the cost of that credit in — or fund it with invoice discounting. Statutory late-payment interest is calculable in the late payment interest calculator.

How lenders read it

When a limited company applies for finance, the terms it grants its own customers say as much as the invoice values themselves. A pattern of long, loosely enforced terms with no discount for early settlement and no visible late-payment clause reads as weak credit control, regardless of how strong the underlying trading relationship is.

Lenders looking at a sales ledger will typically weigh stated terms against actual collection behaviour. A company that consistently agrees short terms and collects close to schedule signals disciplined cash management; one that offers long terms as a default sales tactic, or repeatedly extends them informally to keep a customer happy, signals that cash conversion is being sacrificed for revenue — a pattern worth explaining candidly in any funding conversation.

In practice

Picture a UK limited company that supplies several larger customers under net 60 terms because that is what those customers' procurement teams insist on, while its own suppliers expect payment on much shorter terms. The gap between what it pays out and what it collects is the working-capital strain that debtor days is built to measure — and it is entirely a function of the terms each side has agreed, not of how profitable the underlying sales are.

In that situation, a director's practical options are to renegotiate terms customer by customer (harder with larger buyers who set their own procurement policy), to offer an early-settlement discount to pull cash forward voluntarily, or to fund the gap externally rather than absorb it through stretched supplier payments. None of these is free, which is why payment terms are treated as a genuine commercial decision rather than an administrative afterthought.