Understanding Terms of Credit & How to Set Them for Your Business

Credit terms define the length of time businesses allow customers to pay for goods or services. Establishing flexible payment terms can attract new customers and foster long-term loyalty. However, extending credit also impacts cash flow and introduces risks of late or non-payment. 

A well-structured credit policy helps businesses mitigate risks, ensure timely payments, and maintain healthy cash flow. In this article, we explore: 

• The key components of credit terms 
• How to set and customize payment terms 
• The role of trade credit insurance in mitigating payment risks 

Extending credit terms allows businesses to offer customers the flexibility to pay over a specified period. These terms are usually outlined in invoices and contracts and detail the payment deadline, potential discounts, and penalties for late payments. 

When structured correctly, credit terms can boost sales and customer retention while maintaining financial stability. 

The credit period determines the deadline for payment. Common examples include: 

• Net 30 – Payment due within 30 days from the invoice date 
• Net 60 / Net 90 – Extended terms often used for B2B transactions 
• Due upon receipt – Immediate payment required upon invoice reception 

The European Late Payment Directive sets the standard B2B payment term at 30 days, extendable to 60 days or more by mutual agreement. 

To encourage early payments, businesses may offer discounts for prompt invoice settlement. Example: 

• 1/10, Net 30 – A 1% discount applies if the invoice is paid within 10 days; otherwise, the full amount is due in 30 days 

Late payments disrupt cash flow, making penalties a critical part of credit terms. Many jurisdictions regulate late payment penalties: 

• European Union: 12% annual penalty (European Central Bank rate + 8%) 
• United States: 0.5% of the unpaid tax per month for overdue payments 

Understanding local regulations ensures compliance when setting late payment charges. 

Clear payment terms should specify accepted methods, such as: 

• Bank transfer 
• Credit/debit card 
• Checks 
• Mobile payment solutions 

Offering multiple secure payment options minimizes the risk of delayed payments. 

Several factors determine the best credit terms for your business: 

• Industry Norms – Align with competitors while identifying gaps in the market 
• Cash Flow Management – Ensure credit policies don’t strain working capital 
• Customer Relationships – Flexible terms can build loyalty and increase sales 
• Risk Assessment – Evaluate a customer’s creditworthiness before extending credit 

Step 1: Analyze Cash Flow 

Before extending credit, ensure your business has sufficient working capital. Offering credit too aggressively can cause cash shortages. 

Step 2: Define Discount and Penalty Structures 

Incentivize early payments with discounts and enforce late payment penalties to reduce delinquent accounts. 

Step 3: Check Customer Creditworthiness 

Assess potential clients’ credit reports, payment history, and financial stability to minimize default risks. 

Step 4: Maintain Transparency 

Clearly communicate credit policies, due dates, and penalties to customers. Outline all payment expectations in contracts and invoices to avoid disputes. 

Trade credit insurance, such as Allianz Trade’s solutions, helps businesses mitigate the risks of late or non-payments by securing outstanding receivables. 

• Protects cash flow – Ensures invoices are paid, even if a customer defaults 
• Enhances risk management – Provides financial security when extending credit 
• Supports business growth – Encourages safe expansion by covering payment risks 

With trade credit insurance, businesses can confidently offer flexible terms without jeopardizing financial stability. 

• Align with industry standards – Ensure your credit terms remain competitive 
• Monitor payment behavior – Identify and address overdue accounts early 
• Leverage credit insurance – Minimize risks and maintain financial resilience 

A well-managed credit policy allows businesses to balance growth and risk, ensuring long-term financial stability.