Guide to invoice terms and conditions

Every invoice you send (or receive) is shaped by key clauses that govern timing, amount, and the “what ifs” of payment. For founders, understanding these clauses isn’t just paperwork — it’s a way to optimize financial operations and manage payment-related risks.

In this article, we’ll break down the most common payment terms and conditions founders should know — going beyond the timing of payments.

Invoice terms and conditions are outlined in a contract signed by both the buyer and seller. They set expectations around when payment is due, outline any discounts or penalties, and capture other important details about the transaction.

By setting these terms up front, founders can reduce misunderstandings and disputes that often arise from vague or missing expectations. The more detailed the terms, the smoother the relationship: you’ll see stronger operations, healthier cash flow, and better partnerships between buyers and sellers.

To manage cash flow and set clear expectations with customers, founders need to be fluent in common invoice terms and conditions. Here are the key ones to know: 

Net payment terms: Net terms specify the full payment deadline in days (e.g., “Net 30” means the full amount is due within 30 days of the invoice date). 

Early payment discounts: Discounts incentive buyers to pay sooner, which helps your business bring in revenue more quickly. A common format is "2/10 Net 30," meaning the buyer gets a 2% discount if they pay within 10 days; otherwise, the full amount is due in 30 days. 

Due date: This is calculated based on the invoice date and the agreed-upon net terms.

Late payment penalties: Charges apply if payments aren’t received by the due date. These may be structured as a flat fee or as interest, depending on your agreement.

Payment methods: Payments may be made via bank transfers, credit cards, checks, or other electronic methods. The founder’s goal here is simple: ensure payments are processed smoothly and avoid unnecessary delays. 

Partial payment clauses: Define when incomplete payments are acceptable and how they’ll be applied to the outstanding balance. These are most relevant for larger invoices. 

Advance payments: Buyers may be required to pay part or all of the invoice before goods are shipped or services are delivered. This helps founders mitigate risks with large orders or new customers. 

Installment plans: Allow the invoice to be paid in scheduled increments over an agreed period, which can support customer flexibility without delaying full collection. 

Currency specifications: State clearly which currency payment should be made in. This avoids confusion and ensures exchange rates are considered correctly.

Dispute resolution procedures: Contracts should specify who to contact in case of a dispute, how long each party has to raise concerns, and the process for resolution. This helps founders avoid drawn-out conflicts over invoices. 

Reference Information requirements: Buyers are typically required to include details like invoice numbers or purchase order numbers when submitting payment. This supports accurate tracking and reconciliation.

Legal terms: Most U.S. contracts are governed by a specific state’s common law. The governing contract should specify which state’s law apply in the case of litigation (and invoices may sometimes reference this as well).

Once you understand the meaning behind each payment term,  you can start setting — or negotiating — the terms with your counterparty. Here are some points to keep in mind as you decide what’s right for your business:

What are the standard terms for your industry?

Benchmarking your contract against industry standards helps ensure competitiveness. For instance, ecommerce businesses may use longer net terms to account for inventory turnover. Aligning with common practices makes it easier to manage relationships and meet customer expectations.

How will your invoice terms impact your cash flow?

Cash flow depends on money coming in on time so it can go out on time. Terms that are too short may deter customers; terms that are too long may strain your own operations. Reviewing your cash flow requirements carefully ensures you set terms that work for both sides.

How can you structure terms that are fair for both parties?

You might extend more favorable terms to long-standing customers as a gesture of goodwill and relationship building, while applying stricter terms to new or less established customers to reduce risk. Tailoring terms to each relationship — instead of applying one blanket policy —  helps balance fairness and sustainability.

Does transaction size impact terms?

Larger invoices often justify more flexible terms to fit a customer's cash flow, while smaller invoices tend to have standardized terms to streamline processing and reduce overhead.

Who holds the negotiating leverage in the deal?

Your invoice terms don’t exist in a vacuum — they’re shaped by what competitors offer. Depending on your market position, you may or may have more room to set more “seller-friendly” or “buyer-friendly” terms. In highly competitive markets, founders may  need to offer more attractive terms to win and retain customers. 

What’s your risk tolerance?

Risk-averse businesses often opt for shorter payment periods or require upfront payments. Those willing to take on more risk may extend relaxed terms to attract business. Your choice should align with your overall business strategy and financial stability.

Are your terms consistent with the state of the economy?

Economic conditions affect both how customers behave and what terms they expect. During downturns, customers may push for longer payment terms. In periods of growth, quicker payments might be easier to secure. Adapting your terms to the market helps retain or acquire customers while building stronger relationships.

Keep in mind regulatory requirements

Industries like government contracting, healthcare, or financial services often specific rules about invoices, from what information must be included, to coding requirements, to mandated net terms. Staying compliant is crucial to avoid legal issues and to keep your business in good standing.

Can you incentivize the right behavior without being overly punitive?

Late payment penalties can motivate buyers to pay on time, but they should be fair, legally compliant, and clearly communicated. Striking the right balance helps encourage timely payments without alienating valuable customers.

Customer moment: How Mercury Invoicing helps Alma send polished invoices in seconds

The most effective payment terms are those that evolve with your business and adjust to changing circumstances. Regularly reviewing and refining your approach ensures your financial practices remain resilient and responsive in an ever-changing business landscape.