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Payment terms define when invoices are due and under what circumstances. The UK's latest Commercial Payments Bill 2026 caps B2B payment terms at 60 days maximum in order to stifle the late payment endemic: Late payments cost the UK economy almost £11 billion annually and account for approximately 14,000 business closures each year. Read about how the main types of payment terms, their working capital impact, negotiation tactics, and how to stay compliant with evolving UK and EU regulations.
What are payment terms?
The conditions agreed between buyer and seller that specify when an invoice must be paid, and under what conditions are what are collectively called payment terms. The terms apply symmetrically: each company sits on both sides depending on whether they deal with a customer or a supplier. The terms offered to customers determine Days Sales Outstanding and the terms accepted from suppliers determine Days Payable Outstanding. The gap between the two terms and the actual payment behaviour of the business is what shapes the cash conversion cycle, which is one of the most important metrics in working capital management.
Trade credit, which payment terms enable, accounts for a significant portion of corporate debt. What appears as a simple "Net 30" notation on an invoice is actually a carefully constructed lending arrangement, carrying implicit interest rates, credit risk, and strategic significance.
Types of payment terms
The vocabulary of payment terms is largely standardised, though industry norms vary considerably.
Net terms like Net 15, Net 30, Net 45, Net 60, Net 90 etc. indicate that the full invoice amount is due within the specified number of days from the invoice date. Net 30 is most widely used across professional services, distribution, and technology. Net 60 and Net 90 are rarer, and as of the latest commercial payments bill, Net 90 is now a legal legacy in the UK. These longer terms tend to cluster in construction, manufacturing, and enterprise contracts.
Early payment discount terms (e.g. 2/10 Net 30) offer a discount for faster payment. A buyer may receive 2% off if they pay within 30 days; otherwise, the full amount is due within 30 days. That 2% discount is a significant cost of more than 36% in annualised terms in case the buyer declines it and chooses to pay at day 30.
End of Month (EOM) terms mean payment is due at the end of the calendar month, or sometimes the following month. These are common where billing is consolidated monthly.
Due on Receipt / Cash on Delivery (COD) requires immediate payment upon delivery or upon receipt of the invoice. They are most frequent in lower-trust transactional relationships or one-offs, or where the seller bears significant credit risk.
Letters of Credit are bank-issued instruments that pay the seller once contractual conditions are met. They reduce payment risk in cross-border transactions by substituting the bank's creditworthiness for the buyer's.
Common payment terms at a glance
| Term | Typical use case | Cash flow impact: buyer | Cash flow impact: seller |
|---|---|---|---|
| Net 30 | Standard B2B, professional services | Moderate: 30 days to hold cash | Moderate: 30 days until receipt |
| Net 60 | Manufacturing, construction, enterprise | Favourable: 60 days float | Unfavourable: longer receivable cycle |
| Net 90 | Large capital purchases, long-cycle industries | Very favourable: maximum float | Significant: cash tied up 3 months |
| 2/10 Net 30 | Sellers wanting faster cash | Cost-saving if discount taken | Highly favourable: accelerates receipt |
| Due on Receipt / COD | Transactional, lower-trust | Immediate outflow required | Immediate cash; no receivable |
| Letter of Credit | International/cross-border trade | Bank guarantee cost but payment certainty | Eliminates credit risk |
Why payment terms matter for working capital
Payment terms are the direct inputs to Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO). The difference between them, alongside Days Inventory Outstanding (DIO), affects a firm's cash conversion cycle, namely the number of days cash is tied up between paying for inputs and collecting from customers.
PwC's Working Capital Study 25/26 found that net working capital days in the UK have jumped by nearly half since 2015, while globally, Days Sales Outstanding has risen 5.7% over the past decade, from 47.3 days to 50.0 days. PwC estimates €1.84 trillion in excess working capital could be freed up globally through optimisation.
A pattern is forming: large companies look to have managed to keep their own working capital numbers in check by pushing Days Payable Outstanding higher, hoarding cash at the expense of suppliers.
The buyer-seller tension in one line
Every payment terms negotiation has two sides of the same balance sheet in the room. Buyers want the longest possible windows; sellers want the shortest. Most mid-market companies sit on both sides simultaneously. Extending supplier terms whilst tightening customer terms is, in theory, the single highest-leverage working capital move available.
BCG's 2024 research, for example, shows that suppliers facing extended terms may compensate by raising prices by 5% to 8% when terms are extended 15-30 days beyond industry norms.
Modern treasury platforms now enable finance teams to monitor these metrics in real time, tracking working capital efficiency and payment behaviour across every entity and counterparty.
Setting and negotiating payment terms: a strategic framework
Payment terms should never be set by default. A strategic approach considers multiple dimensions:
1. Industry norms matter
Construction and manufacturing typically operate on 60-90 day terms; professional services on 30 days. Deviating too far signals financial distress or damages competitiveness.
2. Counterparty creditworthiness is critical
Extending credit through generous payment terms is, structurally, lending. Firms use trade credit as an early-warning system: slow payment can be a leading indicator of financial distress. Counterparty management tools can help track payment behaviour continuously.
3. Negotiating leverage and relationship dynamics shape outcomes
Larger buyers often impose extended terms on smaller suppliers, which reflects structural power imbalances. BCG recommends a de-averaged approach: define tailored targets by category, region, and supplier power, avoiding blanket policies that destabilise strategic suppliers.
4. Segment by strategic importance
Pay critical sole-source suppliers promptly to protect supply chain resilience. Collect quickly from high-risk customers. The goal isn't uniform extension or shortening; it's intelligent segmentation.
Automation through cashflow management platforms ensures payment terms translate into accurate forecasts that adjust to how counterparties actually pay, not just contractual terms.
Payment terms and legal compliance
Payment terms operate within significant statutory frameworks in both the UK and EU.
The UK's 2026 regulatory shift
The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses the statutory right to charge interest on overdue B2B invoices at 8% above the Bank of England base rate. GOV.UK guidance confirms that where there are no agreed terms, payment becomes legally late 30 days after the customer receives the invoice.
The most significant development is the Commercial Payments Bill 2026, which introduces a statutory maximum of 60 days for B2B contracts (30 days where the buyer is a public authority). Baker McKenzie's analysis confirms that contractual terms exceeding these limits will be void, not merely unenforceable. This is the largest reform in over 25 years and gives the UK the strongest legal framework on late payments in the G7, according to the government.
EU framework evolution
The EU Late Payment Directive 2011/7/EU requires B2B payments within 60 days (30 days for public authorities), with creditors entitled to statutory interest at ECB rate + 8% plus a €40 recovery fee. In practice, enforcement has been weak — there is no designated national enforcement authority, member state implementation has been uneven, and few SMEs exercise their rights in practice. To address these shortcomings, the European Commission proposed in September 2023 replacing the Directive with a directly applicable Regulation but the proposal is currently blocked in the Council of the EU, with member states unable to agree. The 2011 Directive therefore remains the applicable law.
Moving payment terms from back office to boardroom
The cost of capital is still elevated. Regulatory constraints on DPO extension are tightening. Supply chain resilience is now a strategic priority. Against this backdrop, payment terms have become a boardroom-level working capital lever. The question for finance teams is no longer whether to treat payment terms strategically; it's how to build the processes, data infrastructure, and counterparty intelligence to do so at scale.
Modern aggregation platforms can help consolidate payment execution with real-time cash visibility, ensuring terms agreed contractually translate into accurate forecasting, compliant execution, and audit-ready documentation.
