What is Payment Terms?

The payment period is the core element of payment terms. In the Netherlands, the statutory maximum payment period for B2B transactions is sixty days, unless parties expressly agree otherwise in writing and the longer period is not manifestly unfair to the creditor (Article 6:119a of the Dutch Civil Code). In practice, most SMBs work with periods of fourteen to thirty days.

Beyond the period, payment terms often specify the payment method. Direct debit gives you as a supplier certainty of payment and is sometimes rewarded with a discount. Bank transfer gives the buyer more control. Some contracts work with advance payment (full or partial) or milestone payments for long-running projects.

Early payment discounts are an effective tool for improving cash flow. A typical example is "2/10 net 30": two percent discount if paid within ten days, otherwise the full amount within thirty days. Two percent sounds modest, but annualised it represents a return of over 36 percent.

The consequences of late payment are also set out in the payment terms. By default, you are entitled to statutory commercial interest on the outstanding amount, plus extrajudicial collection costs. But many contracts add penalty clauses or surcharges on top. As a buyer, be aware of what you are accepting.

An often-overlooked element is invoicing frequency. For ongoing services, the payment terms determine whether you are billed monthly, quarterly, or annually. Annual advance payment favours the supplier; monthly billing gives you as buyer more flexibility.

Payment terms have a direct impact on your cash flow. A difference of fourteen versus thirty days on a monthly invoice of five thousand pounds means you have five thousand pounds more or less working capital available at any given time.

For SMBs that depend on timely payments from their own customers, aligning incoming and outgoing payment terms is critical. If your customers pay you in sixty days but your suppliers must be paid in fourteen, you are financing the difference from your own working capital.