Credit terms define the payment agreement between you and your customers. Misunderstanding them creates problems. Let’s break down the basics.
Net Terms
Net 30: Customer has 30 days to pay from invoice date Net 60: Customer has 60 days to pay from invoice date Net 90: Customer has 90 days to pay from invoice date
“Net” means the full amount is due. No discounts. Simple and most common.
Payment Discount Terms
2/10 Net 30: Customer gets 2% discount if paying within 10 days, otherwise full amount due at 30 days
This incentivizes early payment. If invoice is $1,000, customer can pay $980 within 10 days or $1,000 within 30 days.
COD and CIA
COD (Cash on Delivery): Payment required before or upon delivery of goods
Used for higher-risk customers or initial orders. No credit extension.
CIA (Cash in Advance): Payment required before goods ship
Most restrictive. Used only when credit risk is very high.
EOM Terms
EOM (End of Month): Payment due at end of month following invoice
If invoice issued May 15, payment due June 30. Used for regular customers with strong payment history.
Special Terms
DOI (Date of Invoice): Payment terms begin from invoice date (standard) DOM (Date of Month): Payment terms begin from month end 2/10 EOM: 2% discount if paid within 10 days of month end
Why Terms Matter
Clear terms prevent disputes. “I thought I had 60 days!” causes collection friction. Documenting terms in writing prevents misunderstandings.
Standard terms also signal your credit policy. Offering only Net 30 to new customers protects your cash flow. Offering Net 60 to established customers builds loyalty.
Enforcing Terms
Once you set terms, enforce them. Don’t allow consistent violations without consequences. Consistent enforcement trains customers to respect your terms.
If customers regularly pay 45 days despite Net 30 terms, you have two choices: enforce the terms or change them. Ignoring the problem doesn’t solve it.
Term Negotiation
Some customers negotiate better terms as part of sales. Sales should loop in credit before promising extended terms. Credit should have input on acceptable payment terms for each customer based on their creditworthiness and payment history.
The Bottom Line
Clear, enforced, documented credit terms are foundational to effective credit management. Every conversation, every invoice, every collection call starts with “What did we agree to?” Understanding and enforcing your terms prevents most payment problems before they start.
Payment terms are foundational credit concepts. For deeper exploration, see Chapter 2 of The Head of Credit & Collections Handbook
