Payment terms explained: Net 30, early-payment discounts and late fees

01Choosing terms#

Payment terms are a commercial choice, not a rule anyone sets for you. Due on receipt suits small amounts and self-serve plans, usually paid by card. Net 15 or Net 30 is the common default for business customers. Net 45, 60 or 90 is what larger companies tend to ask for, because their own cash planning is built around paying late.

Pick the shortest terms your customers will sign without friction, and match them to how you bill. Annual subscriptions billed in advance give you the cash before you deliver; monthly billing in arrears means you have delivered a month of service, and then wait another month or two for the money. Whatever you choose, put it in the contract, repeat it on every invoice, and make it the default for the customer in your accounting system, so the due date is computed, not typed.

02Counting the due date#

Net 30 means payment is due 30 calendar days after the invoice date, unless the contract says otherwise. Some contracts start the clock on receipt of the invoice, on delivery, or at the end of the month, so the clause matters more than the label.

A worked example. An invoice dated October 1 on Net 30 is due October 31. On Net 30 EOM, as the term is commonly used, it is due 30 days after the end of October: November 30. On 2/10 net 30, the customer can pay 2% less until October 11, and the full amount is due October 31. Your aging runs from those due dates, so a Net 60 invoice is current until day 60 and isn’t chased before then.

When a due date falls on a weekend or holiday, many customers pay the next business day. Decide whether your reminders treat that as late; most companies don’t.

03Early-payment discounts#

An early-payment discount trades a little revenue for faster cash. 2/10 net 30 is the classic form. It is expensive: a customer who skips a 2% discount to pay 20 days later is paying about 37% a year for the privilege, so any customer with cash on hand will take it, and you will be giving up 2% of revenue on those contracts. That trade can be worth it when cash is tighter than margin; it rarely is for a software company with high gross margins and a slow-paying customer who will take the discount and pay on day 40 anyway.

A worked example. You invoice $10,000 on 2/10 net 30 and the customer pays $9,800 on day 8. On the debit side, cash $9,800 and sales discounts (a contra-revenue account) $200; on the credit side, accounts receivable $10,000. Under ASC 606 a discount the customer is expected to take is variable consideration, so if most customers take it, revenue is estimated net of it when the invoice is issued. Agree a policy with your CPA and apply it the same way every month.

If a customer takes the discount after the deadline, decide in advance whether you bill the $200 back or let it go, and record either choice. A short payment nobody dispositions is how small differences pile up in the aging.

04Late fees and interest#

A late fee or interest on overdue balances is enforceable only if the customer agreed to it before the invoice, usually in the contract or in terms they accepted. It is also limited by state law. States set their own maximum interest rates (usury limits) and some regulate late fees separately; the rules differ by state and between consumer and business debts. A rate commonly seen on invoices is not, by itself, lawful everywhere. Have the clause reviewed once by a lawyer in your state, and don’t put a number on an invoice that your contract doesn’t support.

In practice, late fees are more useful as a reason to talk than as income. Many companies waive the first one in exchange for prompt payment. Book a late fee only when you bill it and expect to collect it: debit accounts receivable and credit interest or late-fee income. A fee you have no intention of enforcing is not an asset, and booking it inflates both receivables and income.

05Enterprise procurement realities#

A large customer’s terms are set by its procurement and accounts payable teams, not by the person who bought from you. Expect their paper, not yours, and expect Net 45 to Net 90 as the opening position.

None of the paperwork is difficult, but each item can add weeks before the first payment if it starts after the invoice goes out. Start vendor onboarding the day the contract is signed, ask for the PO in the same email, and put the expected payment date, not the due date, in your cash forecast. Before the first invoice can be paid, you will usually need:

• A vendor onboarding form, your W-9 and your bank details, often through a supplier portal.
• A certificate of insurance and, for software, a security questionnaire or a SOC 2 report.
• A purchase order number to put on every invoice, with a ceiling the invoices can’t exceed.
• An invoice addressed to the right legal entity and submitted through their portal or AP inbox, not to your champion.
• Their payment calendar: many large companies pay vendors only on set days of the month.

06Terms, cash and the forecast#

Terms are where revenue and cash part ways. A $120,000 annual contract billed in advance on Net 30 puts the cash in the bank around day 30 while revenue is recognized over twelve months. The same contract billed monthly in arrears on Net 60 means you deliver for three months before the first dollar arrives. Both are the same revenue; the second needs more runway to support.

Build the forecast from the terms customers actually pay on, which the aging and DSO tell you, not the terms in the contract. If a customer reliably pays on day 55 of Net 30, the forecast says day 55 until they prove otherwise.