How to establish payment terms with clients

Ever had a client suddenly go silent the moment an invoice is due? The reality is that without clear, enforceable payment terms, you risk dealing with late payments or even taking on debt just to keep your business running. That said, you don’t have to be pushy or unprofessional to take control of your payment process—even if you’re just starting your business. You just need the right strategy.

In this guide, we’ll walk through best practices for negotiating payment terms to ensure you set clear expectations with clients and get paid on time.

What is a payment term?

Payment terms are the conditions under which you expect to be paid for your products or services. They help you avoid delayed payments and cash flow problems.

Common payment terms explained

Different industries use different payment terms, but here are some of the most common ones you’ll come across:

• Net 30, Net 60, Net 90: This means the full invoice amount is due within 30, 60, or 90 days and is commonly used for B2B transactions.
• 50% Upfront, 50% on Completion: Often used for project-based work, this structure ensures you get paid partially before starting work.
• Milestone payments: Payments are tied to project stages (e.g., 25% at the start, 50% halfway through, and 25% upon completion), helping you keep cash flow steady for longer projects.

How payment terms impact your business

Your business’s payment terms can make or break your cash flow. Here’s how:

• Longer payment terms (Net 60, Net 90): These may be common when you negotiate payment terms with suppliers, but they can create cash flow gaps if you rely on timely payments to cover expenses such as software subscriptions or contractor salaries.
• Shorter payment terms (Net 7, Net 14, Due on Receipt): These help you get paid faster and keep your cash flow stable, but some clients may push back if they’re used to longer terms.
• Upfront or milestone payments: This payment structure is the most recommended, as it ensures you receive partial payment before completing the work.

To sum it up, whether you’re negotiating payment terms with clients or figuring out how to negotiate payment terms with suppliers, understanding payment terms helps you establish agreements that keep your cash flow steady.

Preparing for negotiation

Before negotiating payment terms, it’s important to understand how your business operates so that your payment terms work for you, not just your clients. Here’s how to prepare for payment terms negotiation:

Assess your business’s financial needs

If your business relies on a steady cash flow, you need to be strategic about the terms you agree to. Here’s how to evaluate your needs before starting payment terms negotiation:

• Calculate your operating expenses: If you need consistent income to cover rent, software subscriptions, or other recurring costs, consider shorter payment terms (Net 7, Net 14) or upfront deposits.
• Evaluate your cash flow cycle: If your business can’t afford to wait 60 or 90 days for a payment, you should avoid long payment terms.
• Account for potential late payments: If delayed payments could put your business at risk, consider adding late fees or offering early payment discounts to encourage clients to pay on time.

Assessing your business’s financial needs ensures you set payment terms that protect you from running your business at a loss. 

Additional reading: 6 bookkeeping tips for small businesses.

Research the client’s payment practices

Before finalizing your payment terms negotiation, check your client’s financial reliability by:

• Checking client payment history: If you’ve worked with this client before, review their history. Do they typically pay on time, or do they delay payments?
• Asking industry peers or suppliers: Use platforms like LinkedIn to ask others who have worked with this client about their payment habits.
• Looking up financial reports: For larger companies, use credit report services like Dun & Bradstreet to check if the client has a poor payment track record.

Having information about your client’s payment history helps you make informed decisions when setting your payment terms, such as extending payments or requiring upfront deposits.

Understand industry standards

Every industry has its own norms when it comes to payment terms, and understanding them will help you justify your terms while remaining competitive.

Here’s a general breakdown of standard payment terms by industry:

• Freelancers & consultants: Typically require 50% upfront, Net 14, or milestone-based payments.
• Agencies & service providers: Often work with Net 30 or milestone payments.
• Manufacturing & wholesale: Usually operate on Net 30, Net 60, or even Net 90, depending on the client size.

Remember, going into payment terms negotiation with a solid understanding of your financial needs ensures that you don’t simply accept whatever terms the client suggests. Instead, you’ll be able to negotiate payment terms with suppliers and clients in a way that supports your cash flow.

Effective negotiation tactics to get favorable payment terms

Negotiating payment terms doesn’t have to feel awkward or confrontational. With the right approach, you can set fair terms and ensure you get paid on time. Here are some tactics for successful payment terms negotiation:

Clearly communicate your payment terms 

One of the most crucial tactics when negotiating payment terms is to have a well-formatted invoice that clearly outlines your terms. To ensure clarity:

• Use simple language: Instead of saying “Net 30,” say, “The invoice is due within 30 days of issue.”
• Put everything in writing: Always document your terms in emails, contracts, and invoices to prevent disputes.
• Clarify payment methods: Let clients know exactly how they can pay (bank transfer, credit card, PayPal, etc.) to avoid delays.

Further reading: 15 invoicing mistakes to avoid with your small business.

Use smart negotiating techniques 

How you present your payment terms significantly impacts whether clients accept them. Here are some psychological strategies to increase your success:

• Build rapport: Start the conversation by focusing on your client’s needs. 
• Use positive language: Frame your terms as a benefit rather than a restriction.
• Time your request strategically: Bring up your payment terms before starting work, preferably during contract discussions.

Read also: 5 ways to take your small business to the next level.

Handling common objections

Even if you communicate your terms clearly and use psychological strategies, some clients may push for longer payment cycles or lower upfront costs. Here’s how to handle common objections:

• If a client asks for longer payment terms: Check their payment history. If they’ve always paid on time, you might consider a small extension (e.g., Net 45 instead of Net 30). However, if they have a record of late payments, stick to shorter terms to protect your cash flow.
• If a client refuses to pay a deposit: Explain that a deposit secures their project and ensures your availability. For example, say, “A 50% deposit allows me to dedicate time exclusively to your project.” If they still hesitate, propose milestone-based payments instead.
• If a client wants smaller installments: Structure payments around clear project milestones instead of offering unlimited flexibility. For example, “We can break payments into three equal installments, aligned with key project phases.” This ensures you still get paid on time while giving the client some flexibility.

Communicating clearly and handling objections ensures you negotiate payment terms with suppliers and clients in a way that keeps your business financially stable and your clients happy.

Legal considerations

Setting clear payment terms is essential, but making them legally binding is what truly protects your business, as it ensures you have legal recourse if payments are delayed or go unpaid.

Why legally binding agreements matter

A written contract is a security measure that ensures both you and your client understand the payment terms. Here’s why you should always use one:

• Clearly written terms eliminate confusion about when and how payments should be made.
• If a client fails to pay, a signed contract gives you grounds to take legal action.
• Having a contract demonstrates professionalism and shows clients that you take your business seriously.

Even for smaller projects, having a contract in place is essential when negotiating payment terms because it reinforces your professionalism and ensures you get paid on time.

What to include in your contract

A well-written contract should be clear, detailed, and legally enforceable. At a minimum, your contract should cover:

• Payment terms & due dates
• Accepted payment methods
• Late fees & interest penalties 
• Refund & cancellation policy
• Signatures

When to consult a legal professional

While you can use templates for basic payment terms negotiation, there are situations where seeking legal advice is essential, such as:

• High-value contracts: If the project involves a significant amount of money, a lawyer can ensure your contract is airtight.
• International clients: Different countries have different contract laws, so legal guidance is crucial when you negotiate payment terms with suppliers or clients overseas.
• Complex payment structures: If you’re using milestone payments, retainers, or penalties, a lawyer can help ensure enforceability.

On a final note, having a legally binding contract ensures timely payments and gives you legal leverage if a client fails to pay.

How to implement the agreed payment terms

Once you’ve negotiated payment terms with your client, the next step is setting up the right systems to ensure you get paid on time and have a plan in place for handling late payments.

Follow-ups and invoicing

A well-structured invoicing system is key to getting paid on time. Here’s how to optimize yours:

• Send invoices promptly: Issue invoices as soon as work is completed, or based on your agreed payment terms negotiation.
• Make invoices clear and detailed: Your invoices should include:
  • Due date based on negotiated payment terms
  • Itemized list of services and the total amount due
  • Payment methods and instructions on how to pay.

• Enforce late fees and policies: Mention your late fees in your follow-ups so clients know you take timely payments seriously.

Check out our free invoice templates to streamline your process.

Payment tracking software

Manually tracking invoices can be overwhelming, especially if you’re managing multiple clients. Using invoicing and payment tracking tools can save you time and ensure all of your payments are accounted for. Tools like Bookipi provide invoice generators that ensure invoices are sent on time, overdue payments don’t go unnoticed, and your negotiated payment terms are followed.

Additional resource: 10 ways to use AI for small businesses.

Handling late payments or non-compliance

Even when you’ve set clear payment terms, some clients may still pay late. Here’s how to handle late payments professionally:

• Send a quick, friendly email If payment is 1–5 days late
• If the invoice is 7–14 days overdue, send a stronger reminder and mention any late fees.
• Offer payment options, like a partial payment or structured payment plan if the client is facing financial difficulties
• If the client still hasn’t paid, stop any further work until payment is received.
• If the invoice is 30–60 days overdue, you may need to send a formal demand letter or take legal action.

Remember, to successfully implement negotiated payment terms, you need a systematic approach for tracking invoices, following up on payments, and handling late clients.