Setting Payment Terms for Your Business

Why payment terms matter for cash flow

Payment terms are not just an administrative formality — they are a core part of your cash flow management. Every day of credit you extend to customers is a day where you have delivered a service or product but have not yet been paid. Extending 30-day terms to all customers is effectively providing a free credit facility, which you fund from your own cash reserves or overdraft.

Tighter terms reduce the gap between delivery and payment. Tighter terms that are communicated clearly and agreed upfront are also more likely to be respected.

Standard payment terms used in Australia

Net 7 (7 days from invoice date): Best for small, discrete jobs and one-off customers. Creates urgency and is appropriate where the amount is modest and the work is complete. Common for sole traders and small contractors.
Net 14 (14 days from invoice date): A strong default for most service businesses. Short enough to stay near the top of the accounts payable queue, long enough to be workable for most clients. Recommended for consulting, trades and professional services.
Net 30 (30 days from invoice date): Standard for wholesale, distribution and larger B2B relationships. Gives buyers two full working weeks to process the invoice. Common but results in higher average debtor days than shorter terms.
30 days from end of month (EOM): Common in distribution and retail supply. An invoice dated 5 June under EOM terms is not due until 31 July — 56 days away. Be aware of the effective days of credit you are extending under EOM terms.
Net 60 (60 days from invoice date): Common for large enterprise and government clients. Only accept 60-day terms if the relationship and volume warrant it, and you can absorb the cash flow impact. Always require a signed credit agreement for 60-day accounts.

Early payment discounts

An early payment discount incentivises prompt payment in exchange for a small reduction in the invoice amount. The notation "2/10 net 30" means: pay within 10 days and deduct 2%; otherwise pay in full within 30 days.

The effective annual interest rate of a 2/10 net 30 discount is approximately 36% — which is expensive funding for the buyer but a valuable cash flow tool for you. Consider offering:

1% discount for payment within 7 days (on net 30 invoices)
2% discount for payment within 10 days (on net 30 invoices)

Only offer early payment discounts where your margin can absorb them. For invoices where your margin is thin, the discount may not be worthwhile.

Factors to consider when choosing your terms

Your supplier terms: If you pay your suppliers in 30 days, you do not want your customers on 60-day terms — you will be funding the gap
Industry norms: Matching industry standard terms reduces friction with customers
Customer size: Larger customers often have rigid internal payment cycles; understand their process before insisting on 7-day terms
Your overdraft or credit facility: If you have a working capital facility, you can absorb longer terms; if not, shorter terms protect you
Customer risk: New customers, small businesses or customers in stressed industries should get shorter terms or prepayment requirements

How to communicate payment terms

Payment terms are only enforceable if they are communicated clearly before the transaction. Communicate them at each stage:

On your quote: Include payment terms in every quote or proposal
In your credit application: For credit accounts, have customers sign a credit application that sets out your terms, interest clause and late fee provisions — see the Merion credit terms template
On your invoice: State the due date explicitly (e.g. "Due: 13 July 2026") rather than just "net 30"
In your email: When sending an invoice by email, note the due date in the body of the email

Interest and late fee clauses

Late fees and interest charges are only enforceable if disclosed in your terms before the transaction. Include an interest clause in your credit application and on your invoices (e.g. "Interest at [X]% per month applies to overdue amounts"). See the guide to adding late fees for detail on enforceability and appropriate rates.

Frequently asked questions

What payment terms should I use?

It depends on your industry, customer size and cash flow needs. For most small service businesses, 14 days is a good default — it is short enough to keep cash flow healthy and is widely accepted. For trades and construction, 14 to 21 days is common. For wholesale and distribution, 30 days (or 30 days from end of month) is standard. For large enterprise clients, you may be asked to accept 60 days — only agree to this if you can absorb the cash flow impact or the relationship warrants it.

Can I change payment terms for existing customers?

Yes, but you should give reasonable notice and document the change. Send a letter or email explaining the new terms and when they take effect. If the customer has a signed credit agreement with existing terms, you will need their written consent to amend it. For ongoing customers without a signed agreement, reasonable notice (e.g. 30 days) is generally sufficient. New invoices issued after the effective date should show the new terms.

What is '2/10 net 30'?

'2/10 net 30' is an early payment discount term meaning: the full invoice amount is due in 30 days, but if the buyer pays within 10 days, they may deduct 2% from the invoice. The notation follows the format: [discount %] / [days to earn discount] net [total days]. For example, '1/7 net 21' means a 1% discount if paid within 7 days, otherwise the full amount is due in 21 days. This notation is less common in Australia than in the US, but is understood by most accounts payable departments.

What happens if I don't specify payment terms?

Under Australian contract law, if no payment terms are specified, the obligation to pay arises within a 'reasonable time' after the supply. What is reasonable depends on the circumstances — for simple services, it is generally considered to be a short period (days to a few weeks). However, relying on 'reasonable time' makes it much harder to charge late fees or interest, and harder to escalate to collection. Always specify payment terms explicitly on your invoices.