Credit Terms

What Are Credit Terms?

Credit terms define the rules of the payment agreement between a seller and buyer. They appear on invoices and contracts and specify the payment deadline, any early payment incentives, and penalties for late payment. The most common credit terms include net-30, net-60, net-90, and variations offering discounts for early payment.

For example, "2/10 net-30" means the buyer gets a 2% discount if they pay within 10 days; otherwise, the full amount is due within 30 days. On a $10,000 invoice, paying within 10 days saves $200.

Why It Matters for Your Business

Credit terms directly affect your cash flow and customer relationships. Setting the right terms requires balancing competitiveness with financial sustainability.

• Cash flow control: Shorter terms (net-15 or net-30) get cash in the door faster. Longer terms (net-60 or net-90) may help you win business but strain your cash flow.
• Customer expectations: Different industries have standard credit terms. Offering shorter terms than the industry norm may lose you customers; offering longer terms may win business but at a cost.
• Discount economics: Early payment discounts like 2/10 net-30 can be expensive when annualized (the 2% discount on 20 extra days equates to roughly 36% annually), but they significantly speed up collections.

Best practice is to clearly communicate credit terms before starting work, include them prominently on every invoice, and enforce them consistently. Consider different terms for different customer segments based on their payment history and order size.