Credit terms are the conditions under which a seller lets a customer pay after delivery. They set when payment is due and may add incentives for paying early or charges for paying late.
How it works in factoring
Common forms include:
- Net terms: the full amount is due within a set number of days, such as net 30 or net 60.
- Early-payment discounts: written like "2/10 net 30", meaning the customer may take a 2% discount if it pays within 10 days; otherwise the full amount is due in 30 days.
- End-of-month terms: payment due a set number of days after the end of the month in which the invoice was issued.
- Cash in advance or on delivery: no credit extended.
- Progress or milestone terms: used in construction and projects, with payments tied to stages of work.
Credit terms matter to a factor because they determine how long invoices will be outstanding. Longer terms mean more time for fees to accrue and more risk. Early-payment discounts can cause dilution if customers take the discount on factored invoices, so factors want to know about them in advance.
Factors also compare stated terms with how customers actually pay. A customer on net 30 that routinely pays in 60 days changes the cost picture.
What to check
- Make terms clear on every invoice and in customer contracts
- Tell your factor about any discounts, rebates or special terms
- Consider whether factoring lets you offer longer terms to win business, and what that would cost