Credit terms are the time limits you set for your customers' promise to pay for their merchandise or services received. When customers purchase your merchandise or services, you expect them to pay within a specific period of time (generally, 30 days). As a result of this promise, you agree to give up an immediate cash inflow until a later date. The credit terms of most businesses are either 30, 60, or 90 days. However, some businesses may have credit terms as short as 7 or 10 days. Often times a business's credit terms are dictated by an industry standard, or by its competition. For more information on the advantages and disadvantages of offering credit, see building a credit policy that works.
The credit terms for your business have a direct influence on the cash flow of your business. Longer credit terms mean your business will have to wait longer for the cash inflows from the collection of accounts receivable. In the meantime, your business may experience a cash flow shortage.