Commercial Agreements

Payment Terms for Contracts: What to Include

Cash flow kills more small businesses than anything else. Well-drafted payment terms in your contracts are your first line of defence.

Last updated: February 2025

Standard Payment Terms in the UK

Payment terms define when and how payment is due. For UK B2B contracts, the most common terms are net 30 days from invoice, though this varies by industry. The key is to be explicit — vague terms like 'payment on receipt' are unenforceable and lead to disputes.

  • Net 30 days: payment due within 30 days of invoice date — the UK default for B2B
  • Net 14 days: increasingly common for small businesses and freelancers who need faster cash flow
  • Payment on completion: full payment due when deliverables are accepted, common for project work
  • Milestone payments: payments tied to project milestones, splitting the total across delivery phases

Protecting Your Cash Flow

Late payment is a persistent problem for UK small businesses. The Federation of Small Businesses reports that 50,000 businesses close each year due to cash flow problems, with late payment a major contributing factor. Your contract should include multiple protections.

  • Require deposits or advance payments for new clients — 25-50% upfront is common
  • Include a right to suspend services or withhold deliverables if payment is overdue
  • Add late payment interest as a contractual right, referencing the Late Payment of Commercial Debts Act
  • For ongoing services, require payment by direct debit or standing order to reduce late payment risk

VAT and Invoice Requirements

UK VAT-registered businesses must issue VAT invoices that meet HMRC requirements. Your payment terms should reference your invoicing process and ensure that invoices are issued promptly to start the payment clock running.

  • VAT invoices must include your VAT number, invoice date, unique invoice number, and a breakdown of VAT
  • Issue invoices promptly — delayed invoicing delays payment and creates cash flow gaps
  • Specify whether prices are quoted inclusive or exclusive of VAT to avoid disputes
  • For international clients, state whether reverse charge VAT applies

Key Takeaways

  • Net 30 days is the UK default for B2B payment terms, but shorter terms (net 14) are increasingly common for small businesses.
  • Deposits, suspension rights, and late payment interest clauses protect your cash flow from habitual late payers.
  • Prompt invoicing with compliant VAT invoices starts the payment clock and avoids unnecessary delays.

Frequently Asked Questions

What is the standard payment term for UK businesses?

Net 30 days from invoice date is the most common B2B payment term in the UK. However, the government's Prompt Payment Code encourages payment within 30 days and discourages terms longer than 60 days. Small businesses are increasingly moving to net 14 or net 21 to improve cash flow.

Can I charge interest on late payments?

Yes. Under the Late Payment of Commercial Debts (Interest) Act 1998, you can charge interest at 8% plus the Bank of England base rate on overdue B2B invoices. You can also claim a fixed compensation amount: £40 for debts up to £999.99, £70 for debts from £1,000 to £9,999.99, and £100 for debts of £10,000 or more.

Should I offer early payment discounts?

Early payment discounts (such as 2% for payment within 10 days, known as 2/10 net 30) can incentivise faster payment. They work well with larger clients but can erode margins if used broadly. Calculate whether the cost of the discount is less than the cost of late payment and the financing you would otherwise need.

Related Guides

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This is guidance for UK businesses, not legal advice. For complex legal matters, consult a qualified solicitor.

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