Payment terms on an invoice are the rules that tell a buyer when to pay, how to send the money, and what it will cost if the payment is late. They form a binding part of the deal between seller and buyer, and they cover everything from early-payment discounts to interest on overdue balances. Because no single federal law dictates what a private-sector invoice must contain, the specific terms are set by the contract between the parties, with default rules under the Uniform Commercial Code and other laws filling any gaps.
What Payment Terms Cover
On a well-drafted invoice, the payment-terms block does four jobs at once. It states the due date. It lists the accepted payment methods. It spells out any discount for paying early. And it puts the buyer on notice of any penalty for paying late.
Those four items sit alongside the rest of the invoice’s foundational details: the invoice date, a unique invoice number, the full legal names and addresses of both parties, a description of the goods or services, and the total amount due including tax and shipping. The invoice date matters more than it looks. It starts the clock. Without it, a seller has no way to enforce a Net 30 or Net 60 window, because there is no agreed starting point.
What the Standard Shorthand Means
Businesses use a small set of shorthand codes to state when payment is due. These are not suggestions. They set the contractual maturity of the debt, and missing the stated deadline puts the buyer in default.
- Net 30 / Net 60 / Net 90. The full amount is due 30, 60, or 90 days from the invoice date. Net 30 is the most common credit window in business-to-business transactions.
- Due on Receipt. Payment is expected as soon as the buyer receives the invoice. No grace period.
- Cash in Advance (CIA). The buyer pays before the seller ships goods or performs services. Sellers use this with new or higher-risk buyers to eliminate non-payment risk.
- Cash on Delivery (COD). Payment is collected at the moment goods are physically delivered.
- End of Month (EOM). Payment is due by the last day of the month the invoice was issued, regardless of the invoice date.
How to Read an Early Payment Discount
Some invoices offer a small discount for paying quickly. The most common format is 2/10 Net 30: the buyer gets a 2 percent discount if they pay within 10 days, otherwise the full balance is due in 30 days. On a $5,000 invoice, paying inside that 10-day window saves the buyer $100.
The pattern is always the same. The first number is the discount percentage, the second is the number of days to earn the discount, and the last is the total credit period. So 1/10 Net 30 offers a 1 percent discount for payment within 10 days on a 30-day term, and 3/10 Net 60 offers 3 percent for payment within 10 days on a 60-day term.
For a buyer with cash on hand, these discounts are usually worth taking. A 2 percent savings for paying 20 days early (day 10 instead of day 30) works out to an annualized return of roughly 36 percent.
Late Fees and Interest on Overdue Balances
When a payment misses its deadline, the invoice’s late-fee provisions decide what comes next. Those provisions have to be stated in the invoice or the underlying contract before the transaction happens. A seller generally cannot impose a penalty the buyer never agreed to.
Two structures are common. The first is a monthly interest charge on the unpaid balance, typically 1 to 1.5 percent per month, or 12 to 18 percent annualized. On a $5,000 past-due invoice, a 1.5 percent monthly charge adds $75 every 30 days. State usury laws cap the maximum rate a creditor can charge, and those caps vary. In states without a specific commercial cap, courts look at whether the rate is reasonable given industry norms and the size of the debt.
The second is a flat late fee, often between $25 and $50 per late instance, sometimes stacked with the percentage charge. Courts treat these as liquidated damages, meaning an agreed estimate of the administrative cost of chasing an overdue payment. If a court finds the fee is grossly out of line with the seller’s actual costs, it can refuse to enforce it under the UCC’s unconscionability doctrine, which lets courts strike contract terms that are grossly unfair.1Cornell Law – Legal Information Institute. UCC 2-302 Unconscionable Contract or Clause The practical rule for both sides: late fees have to be reasonable and disclosed up front.
Accepted Payment Methods and Card Surcharges
Payment terms should also state exactly how the buyer can send funds. Listing accepted methods prevents a buyer from paying in a form the seller cannot process, which stalls the whole transaction. The usual options are ACH transfers (electronic transfers through the Automated Clearing House network, using a nine-digit routing number and an account number), wire transfers (bank-to-bank, faster than ACH but usually with higher sender fees), paper checks (mailed to the address on the invoice, made out to the exact legal payee name), and credit cards.
Credit cards come with strings. Many sellers pass the processing cost to buyers as a surcharge, and if you do, two limits apply. Card networks like Mastercard cap surcharges at 4 percent of the transaction amount.2Mastercard. Mastercard Credit Card Surcharge Rules and Fees for Merchants Federal law also bars surcharges on debit card transactions, even when the card carries a Visa or Mastercard logo.3GovInfo. 15 USC 1693o-2 Reasonable Fees and Rules for Payment Card Transactions Several states ban credit card surcharges entirely, so check state rules before adding one. Where a surcharge is allowed, it has to be disclosed at the point of sale and on the receipt.
What Happens If the Invoice Says Nothing
If an invoice does not specify a due date or payment window, the Uniform Commercial Code, adopted in some form by every state, fills the gap. Under UCC Section 2-310, payment is due at the time and place the buyer receives the goods when no other agreement exists.4Cornell Law – Legal Information Institute. UCC 2-310 Open Time for Payment or Running of Credit In plain terms, the default is “due on receipt.”
That default works against sellers who meant to extend credit. If you want to give a buyer 30, 60, or 90 days to pay, the invoice or the contract has to say so. The default also means the buyer has no obligation to pay before delivery, which is a problem for sellers who expected money up front. Writing the terms out removes the ambiguity.
When the Buyer Is a Federal Agency
Selling to the federal government is a special case, and it overrides whatever custom terms sit on the invoice. The Prompt Payment Act requires agencies to pay proper invoices within 30 days of either receiving the invoice or accepting the delivered goods, whichever is later.5Acquisition.GOV. FAR 52.232-25 Prompt Payment Some categories run shorter:
- Meat and fish products: 7 days from delivery.
- Perishable agricultural commodities: 10 days from delivery.
- Dairy products and edible fats or oils: 10 days from receiving a proper invoice.
If an agency misses its window, it must automatically pay the contractor an interest penalty. The contractor does not have to ask.6Office of the Law Revision Counsel. 31 USC 3902 Interest Penalties The rate is tied to Treasury bill auctions and is published in the Federal Register every six months. For the first half of 2026, it is 4.125 percent per year.7Federal Register. Prompt Payment Interest Rate; Contract Disputes Act Any interest penalty left unpaid for more than 30 days gets added to the principal, and interest then accrues on the combined total.