Payment Terms Definition
Payment terms define when, how, and under what conditions a buyer must pay a seller for goods or services. They outline due dates, accepted payment methods, credit terms, and penalties for late payments to ensure smooth transactions.
Payment terms in a contract usually include the following details:
- Due Date: The deadline for payment, often Net 7, 14, 30, 60, or 90 days.
- Payment Methods: Accepted options like BPAY, direct debit, credit cards, or EFT.
- Credit Terms: Defines if the buyer can delay payment and for how long.
- Late Payment Penalties: Fees or interest charged for overdue payments.
- Deposit or Advance Payments: Specifies if upfront payment is required before work begins.
Payment terms set clear expectations in contracts, reducing contract disputes and ensuring all parties follow agreed financial conditions. A well-defined payment structure helps businesses manage cash flow, track payments, and comply with Australian contract law.
Example of Payment Terms in an Invoice
The example below shows a structured invoice with payment terms, outlining different payment options, due dates, and applicable discounts. It provides clear conditions for Net 30, Net 15, and Net 7, allowing customers to choose based on their cash flow needs. The invoice also includes late payment penalties, banking details, and accepted payment methods, ensuring transparency in financial transactions.
See this Australian invoice example with clear payment terms and flexible due dates!Why are Payment Terms Important for Businesses?
Payment terms help businesses manage income, control costs, and maintain cash flow stability. Clear terms reduce the risk of late payments, which can cause financial strain and operational delays.
Businesses benefit from setting clear payment terms in several ways:
- Cash Flow Management: Predictable payments help avoid cash shortages and financial instability.
- Cost Planning: Ensures timely payments to suppliers, employees, and operational expenses.
- Late Payment Risks: Delays in receiving payments can lead to financial instability and debt.
- Legal Protection: Well-defined terms provide legal grounds for enforcing payments.
- Stronger Supplier Relationships: Reliable payments build trust with vendors and partners.
In Australia, the Payment Times Reporting Scheme requires large companies to report how quickly they pay small business suppliers. This policy encourages faster payments, helping small businesses stay financially stable, reduce payment disputes, and avoid breach of contract.
What are the Standard Payment Terms in Australia?
Businesses in Australia use various payment terms to define when payments must be made. These terms set clear expectations for both parties and help businesses manage cash flow, expenses, and financial stability.
The most common payment terms in contracts include:
| Payment Term |
Description |
| Net 7, 14, 30, 60, 90 |
Payment must be made within 7, 14, 30, 60, or 90 days after the invoice date. 30-day payment terms (Net 30) are the most widely used. |
| End of Month (EOM) |
Payment is due at the end of the month in which the invoice was issued. |
| Cash on Delivery (COD) |
Payment must be made immediately when goods or services are delivered. |
| Stage Payments |
Payments are made in instalments based on project progress, common in construction contracts. |
| Retention Money |
A portion of the payment is withheld until project completion to ensure contractor performance. |
| Forward Dating |
Payment is scheduled for a future date, often used in supplier agreements. |
| Partial Payments |
The buyer makes multiple smaller payments instead of one lump sum. |
Selecting the right payment terms depends on business needs, industry practices, and financial agreements. Construction contracts often use stage payments and retention money, while retail and supplier agreements may prefer Net 30 or COD for faster payments.
How Do Payment Terms Apply to Invoices?
Payment terms in invoices outline when and how a buyer must pay, ensuring both parties follow the agreed contract terms and conditions. These terms provide clarity on due dates, amounts, and penalties, helping businesses avoid payment delays and disputes.
Invoices should include the following payment details:
- Invoice Date & Due Date: The date the invoice is issued and the final deadline for payment (e.g., Net 30, EOM).
- Total Amount Payable: The exact amount due, including GST or additional charges.
- Accepted Payment Methods: Payment options like BPAY, EFT, direct debit, credit cards, or cheque.
- Advance Deposits & Staged Payments: Indicates if a deposit is required upfront or if payments will be made in stages.
- Penalties for Late Payments: Specifies fees, interest, or legal consequences for overdue payments.
What Are Credit Terms and Their Risks in Australia?
Credit terms define how long a buyer has to pay for goods or services after receiving them. These terms are set in contracts to outline payment deadlines and conditions, allowing businesses to manage cash flow and financial risk.
The most common credit periods in Australia include:
- No Credit: Payment must be made immediately at the time of purchase.
- 7-Day Credit: Payment is due within 7 days after receiving the invoice.
- 21-Day Credit: The buyer must pay within 21 days of the invoice date.
- 28-Day Credit: A longer credit term where payment is due within 28 days.
Offering credit can help businesses increase sales and build long-term customer relationships, but it also comes with risks, including:
- Late Payments & Non-Payment: Buyers may delay payments or fail to pay entirely, affecting business cash flow.
- Debt Collection Challenges: Businesses may need to spend time and money chasing overdue payments.
- Credit Checks & Credit Restrictions: Some businesses assess a buyer’s financial history before offering credit, while others set limits on credit amounts to reduce risk.
To minimise financial loss, businesses should set clear credit terms, conduct credit checks, and enforce payment deadlines. Construction contracts and supplier agreements often use credit terms cautiously to avoid cash flow disruptions.
What Are the Common Payment Methods in Australia?
Businesses in Australia use various payment methods to process transactions efficiently. The choice of payment method depends on industry practices, contract agreements, and buyer preferences.
The most widely used payment methods include:
| Payment Method |
Description |
| BPAY & POLi Payments |
Secure online payment options used for business and consumer transactions. |
| Direct Debit & EFT (Electronic Funds Transfer) |
Funds are transferred directly from one bank account to another. |
| Credit/Debit Cards |
Buyers pay using Visa, Mastercard, or American Express. |
| Digital Wallets (Apple Pay, Google Pay) |
Contactless payments linked to mobile devices. |
| Buy Now Pay Later (BNPL) Services (Afterpay, Zip Pay) |
Allows instalment payments over time, often used for retail purchases. |
Selecting the right payment method depends on the business model, transaction size, and customer preferences. Many Australian businesses accept multiple payment options to improve cash flow and customer convenience.
Legal and Regulatory Requirements for Payment Terms
Businesses in Australia must follow specific laws and regulations to ensure fair and timely payments. These rules help contractors, suppliers, and small businesses avoid late payments and cash flow issues.
The key legal and regulatory requirements include:
- Security of Payment Act: Gives contractors and subcontractors in the construction industry the right to claim progress payments and take legal action for unpaid work.
- Payment Times Reporting Bill 2020: Requires large businesses (turnover over $100 million) to report their payment times to small business suppliers every six months.
- Australian Supplier Payment Code: A voluntary industry guideline where businesses commit to paying suppliers within 30 days.
- Government Policy RMG 417: Ensures non-corporate Commonwealth entities pay small supplier invoices within 5-20 days, depending on e-invoicing compliance.
- Late Payment Penalty Provisions: Some contracts include penalty clauses for overdue payments to discourage late payments.
- Consumer and Business Debt Collection Guidelines: Outlines legal debt recovery processes, ensuring businesses follow ethical collection practices.
Large companies that fail to comply with reporting requirements may face government scrutiny, while construction contractors can enforce payments through legal claims under the Security of Payment Act.
What Happens If a Customer Doesn’t Pay on Time?
If a customer misses a payment deadline, businesses must take action to recover overdue payments while maintaining professionalism. Late payments affect cash flow and may require legal steps for debt recovery.
Common debt collection strategies include:
- Phone Calls & Email Reminders: Contacting the customer immediately after the due date to request payment.
- Sending a Letter of Demand: A formal notice stating the overdue amount, payment deadline, and consequences of non-payment.
- Offering a Payment Plan: Negotiating a structured repayment agreement to help the customer settle the debt.
- Applying Late Payment Fees: Charging interest or penalty fees as stated in the contract.
- Using a Debt Collection Agency: Hiring a third-party service to recover unpaid invoices, often for a commission or fixed fee.
- Lodging a Claim Under the Security of Payment Act: If the debt relates to construction work, contractors can lodge a claim and enforce payment through legal channels.
- Pursuing Legal Action: Taking court action or filing a statutory demand for unpaid debts.
Debt collection can be time-consuming and costly, especially if legal steps are required. To reduce the risk of late payments, businesses should set clear payment terms, conduct credit checks, and enforce penalties for overdue payments.
How Can Mastt Help Construction Professionals Manage Payment Terms?
Mastt’s construction project management platform helps project owners and managers track, manage, and enforce payment terms to ensure timely and transparent financial processes. By providing real-time reporting, contract tracking, and automated workflows, Mastt reduces the risk of late payments, disputes, and cash flow issues in construction projects.
Here’s how Mastt simplifies payment term management:
- Contract & Payment Tracking: Allows users to monitor contract payment terms, due dates, and approval status in one centralised platform.
- Progress Payment Management: Automates progress payment tracking to ensure contractors and subcontractors are paid on time.
- Cash Flow Forecasting: Helps project owners plan finances efficiently by tracking expected payments and future liabilities.
- Compliance with Security of Payment Act: Ensures payments comply with Australian construction payment laws, reducing legal risks.
- Audit & Reporting Features: Generates reports on payment history, outstanding invoices, and contract compliance for better financial control.
With Mastt, construction professionals can reduce financial risks, improve cash flow visibility, and ensure all contract payment terms are met, keeping projects on track and avoiding payment disputes.
FAQs About Payment Terms
If a client misses a payment deadline, businesses can send reminders, charge late fees, or take legal action depending on the contract. In construction, the Security of Payment Act allows contractors to lodge a claim to recover unpaid amounts.
Businesses can set clear payment terms, offer early payment discounts, apply late fees, and automate invoice reminders. Conducting credit checks before extending payment terms also helps minimise risks.
Small businesses benefit from shorter payment terms like Net 7 or Net 14 to maintain steady cash flow. Accepting upfront deposits, using automated payment reminders, and enforcing penalties for late payments can also help ensure timely payments.
