Common Business Contract Terms and What They Mean

Being a business owner is incredibly fulfilling — but it also involves some important tasks that might not be fun, but that will help your business thrive. One of those tasks includes sending invoices to your customers and clients.

When it comes to invoices, you want to make sure they include all of the necessary contract terms that will help you get paid faster. However, contract terms can often be confusing, not only for your clients but for you as a business owner as well.

In this post, we’ll explain what some of those business contract terms often mean and why you may want to consider including them on your invoice. Of course, when you create your own contracts for your business, be sure to consult with a legal expert — only a trained professional who knows your specific needs can address all the nitty-gritty details that go into a binding legal agreement.

Common Business Contract Terms Definition

Common contract lingo may include payment terms such as Net 30, Net 60, and Net 90.

Net 30, 60, 90

The terms above mean that the payment for the invoice is due within 30, 60, or 90 days after the invoice date. However, they can be confusing to clients, so it’s advisable to use a term that is easier to understand such as “days” instead of Net. On top of using 30, 60, and 90, you can also use Net 15 or Net 45 as payment terms, depending on your business, cash-flow needs, and accountant’s advice.

2/10 Net 30

Another common payment term that you might encounter or use on invoices is 2/10 Net 30. This means that the invoice has to be paid within 30 days of the invoice date, but if your client pays the invoice within 10 days of the invoice date, they will receive a 2 percent discount.

Why You Need to Include Payment Terms on Your Invoice

Including payment terms on your invoice is necessary for a few reasons.

  • It helps your clients understand when their payment is due. If you also include other necessary elements on your invoice such as a late fee or terms of sale, it helps them avoid added expenses as a result of an overdue payment.

  • Setting payment terms also affects your cash flow. The longer your payment terms are, the higher the chances are of having to wait for a payment which means you could run into difficulty covering all of your costs. Setting shorter payment terms or including an incentive like a discount for early payment can help ensure that your invoices get paid on time and that your expenses are covered.

  • Payment terms help you make educated decisions on when you might expect payment and how the money coming in will be spent. This helps you spread your expenses throughout the month so you don’t have to worry about missed payments for any of your expenses.

Payment terms are a necessary component of every invoice you send to your clients and customers as well as any invoice you might receive from other business owners yourself. Use this article to familiarize yourself with different payment terms and how to use them on your invoices.


Brenda Barron

Brenda Barron is a freelance writer, editor, and SEO specialist from southern California. She is a contributor to The Motley Fool and blogs regularly at The Digital Inkwell.

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