What are credit terms?

Credit terms specify the payment conditions offered to clients, including payment due date, early payment discounts, and late payment penalties. For professional service firms, credit terms balance client convenience with cash flow needs. Common terms include Net 30 (due in 30 days), 2/10 Net 30 (2% discount if paid within 10 days, otherwise due in 30), and various combinations based on client relationships and firm policy.

Key characteristics

• Defines when payment is due from clients

• May include early payment discounts

• May include late payment penalties

• Should be communicated clearly in contracts and invoices

• Can be customized for specific clients

• Directly impacts cash flow timing

Why it matters for professional service firms

Credit terms directly impact when cash arrives. Net 30 terms mean expecting payment in 30 days; Net 60 extends to 60 days, tying up more working capital. Early payment discounts accelerate cash at a cost. Professional service firms should set credit terms strategically: standard terms for most clients, tighter terms for higher-risk relationships, and consider whether early-payment discounts make economic sense given the firm's cost of capital.

Real-world example

David's firm used Net 30 terms for all clients, but many still paid in 50-60 days. Two initiatives: implemented a late payment fee (1.5% monthly after 30 days, disclosed in contracts) and offered an early payment discount (2% if paid within 10 days). Results varied by client: some larger clients shifted to paying early for a discount (improved cash flow at a 2% cost, equivalent to a 24% annual return for accelerated cash), while others started paying closer to 30 days to avoid late fees. Overall average collection improved from 52 days to 36 days through strategic credit terms and enforcement.