Definition: The payment term is the contractual or invoice-stated period within which a customer must pay the invoice amount to the supplier or service provider. It defines the time between invoicing and maturity and forms the basis for cash flow planning, dunning, and the posting of receivables in accounting.
Legal framework
For German companies the payment term is not just a commercial agreement but is governed by statutory rules in the German Civil Code (Bürgerliches Gesetzbuch, BGB) and the Value Added Tax Act (Umsatzsteuergesetz, UStG). Of particular relevance are the provisions on default in payment (§ 286 BGB) and on interest on late payments (§ 288 BGB). For input VAT deduction and mandatory invoice information, §§ 14 and 15 UStG (invoice requirements and input tax deduction) are especially relevant.
Important: If no payment is received after the payment term expires, the debtor can automatically be in default — typically 30 days after receipt of the invoice, unless a different agreement exists. In B2B transactions, late payment interest (base rate + 9 percentage points) and a flat-rate compensation of €40 are also enforceable.
Practice in accounting
For freelancers and small businesses the payment term is central to posting receivables and managing liquidity. Common practice:
- Issue invoice: Post the outstanding receivable (accounts receivable / trade receivables) immediately when the invoice is sent.
- Monitoring: Maintain an accounts receivable aging report to identify overdue items.
- Receipt of payment: When payment is received, the receivable is cleared; any cash discounts (skonto), partial payments or returned direct debits should be posted accordingly.
Example entry (Invoice: Net €1,000, VAT 19% = €190, Gross €1,190):
| Transaction | Entry (short form) |
|---|---|
| Issue invoice | Accounts receivable 1,190 to Sales revenue 1,000 / VAT 190 |
| Payment within cash discount period (2% discount on net) | Bank 1,166.20 / Discount expense 20 / VAT 3.80 to Accounts receivable 1,190 |
Note: If you apply the small business scheme (Kleinunternehmerregelung), VAT does not apply, and therefore no VAT correction is required for cash discounts.
Cash discounts and due dates
A payment term can be linked to cash discount or rebate conditions (e.g. "2% cash discount if paid within 10 days, net due within 30 days"). From an accounting perspective it is important to record discounts separately because they reduce revenue and may require a VAT correction.
Consequences of non-compliance and receivables management
If the debtor misses the payment term, the practical steps are:
- Friendly payment reminder shortly after the due date;
- Dunning notice with a deadline and, if necessary, a warning about interest on late payments;
- Legal action in case of persistent default (debt collection, court dunning procedure).
Legally support your approach with clear contractual clauses: agree payment terms in writing, state the invoice date and due date on the invoice, and document payment reminders. Late payment interest and the statutory flat-rate compensation (€40) should be communicated as possible follow-up costs and taken into account in accounting.
Practical tips for freelancers and small businesses
To reduce payment defaults and improve cash flow, consider the following measures:
- Define standard payment terms (e.g. 14 or 30 days) and state them on all invoices;
- Use cash discount rules selectively if you want to encourage prompt payment;
- Early warning system: regularly review the accounts receivable list and use automated dunning runs;
- For larger projects agree interim or partial invoices to secure liquidity;
- For repeat customers negotiate payment conditions and, if necessary, require advance payment.
Conclusion: A clearly defined payment term is a simple but effective tool to make liquidity predictable and to limit receivable risks. In accounting it ensures clean posting of receivables and facilitates dunning processes as well as compliance with tax requirements.