B2B Payment Terms in India: How Small Businesses Can Give Credit Without Losing Cash

A customer asking for 30 or 60 days of credit can make a sale look bigger and your bank balance look worse. This is why payment terms are not a line that finance adds to an invoice. They are part of pricing, sales qualification and working-capital management. The goal is not to demand advance payment from everyone. The goal is to decide how much credit each customer deserves, how long they get, and what happens before an invoice becomes overdue. What are payment terms? Payment terms define when and how a customer must pay you. Common structures include advance payment, payment on delivery, milestone billing, Net 15, Net 30 and Net 45. If an invoice says Net 30, payment is generally due within 30 days from the agreed trigger date. Your contract should make that trigger clear. Depending on the deal, it may be invoice date, delivery, acceptance or completion of a milestone. TermHow it worksTypical use 100% advanceCustomer pays before work or dispatchNew customers, custom work, small orders 50% advance, 50% before deliveryDeposit funds executionProjects, manufacturing, creative work Milestone billingInvoices follow agreed deliverablesLong projects and implementations Net 15Short credit windowSmaller B2B customers Net 30One-month credit windowEstablished customers Net 45Longer credit windowSelected customers where economics support it Start with the cost of giving credit Credit is financing. If you deliver today and collect 45 days later, your business funds salaries, inventory, GST, logistics and overhead during the gap. Suppose you invoice ₹10 lakh per month and your customers take an average of 45 days to pay. Roughly ₹15 lakh of revenue can sit in receivables at a steady run rate. If you reduce collection time to 30 days, the same simple model brings receivables closer to ₹10 lakh. That can release roughly ₹5 lakh of working capital, subject to timing and sales mix. This is why sales teams should not offer longer terms casually to close a deal. Build a customer credit score before choosing terms You do not need a complicated bank model. Score five factors from 1 to 5. FactorWhat to check Payment historyHas the customer paid you on time? Business stabilityHow established and financially credible is the buyer? Order concentrationHow much exposure would one unpaid invoice create? CustomisationCan the product or work be resold if the customer cancels? Collection frictionDoes the buyer have clear PO, acceptance and AP processes? A new customer ordering a highly customised ₹8 lakh product should not automatically receive the same terms as a five-year customer with a clean payment history. Set both a payment term and a credit limit Payment days alone do not control risk. Imagine a customer has Net 30 terms but can place four ₹5 lakh orders before paying the first invoice. Your real exposure is ₹20 lakh. Set a credit limit such as: Maximum open receivables = approved credit limit. When open invoices cross the limit, new orders require advance payment, part-payment or management approval. Use deposits when your cost starts before delivery A deposit is especially useful when you buy raw material, reserve people or create something customer-specific. Example: Order value: ₹6 lakh Direct material and external cost before delivery: ₹2.4 lakh Advance: 40%, or ₹2.4 lakh The advance covers the cash you must commit before the customer receives the final output. This is often more logical than picking 50% because it sounds standard. Milestone billing can reduce project risk For a ₹12 lakh implementation, waiting until completion creates unnecessary exposure. A milestone structure could be: 30% on signing: ₹3.6 lakh 30% after design or setup approval: ₹3.6 lakh 30% on deployment: ₹3.6 lakh 10% after final acceptance: ₹1.2 lakh The exact split should match where your costs and delivery risk occur. Understand the MSME 45-day rule India's MSMED Act contains specific delayed-payment protection for qualifying micro and small enterprise suppliers. Section 15 provides that where the buyer and supplier agree a payment date in writing, the agreed period cannot exceed 45 days from acceptance or deemed acceptance. Where there is no written agreement, the appointed-day mechanism is linked to 15 days from acceptance or deemed acceptance. Section 16 provides for interest on delayed amounts at three times the RBI bank rate, compounded with monthly rests, subject to the statutory conditions. Do not treat this as a reason to write “45 days” on every invoice. A contract can require payment earlier. If you agree Net 15 or Net 30, your commercial due date remains important. Also distinguish your role. If you are buying from a qualifying micro or small supplier, the rule affects your accounts payable process. If you are the qualifying supplier, it affects how you document acceptance and pursue delayed payments. Make the trigger date unambiguous Many payment disputes are really documentation disputes. Your contract should define: When an invoice can be raised What counts as delivery What counts as acceptance How defects or objections must be communicated When the payment clock starts Whether taxes are included or added Who approves the invoice For service businesses, vague phrases such as “payment after completion” can create problems if completion itself is not defined. Price longer credit terms deliberately Suppose two customers want the same ₹10 lakh project. Customer A pays 50% advance and the balance within 15 days. Customer B wants 60 days after completion. These are not economically identical deals. Customer B asks you to finance a larger amount for longer and creates more collection risk. Your response can be one of four things: Keep the same price but reduce the credit period. Keep the longer term but ask for a deposit. Use milestone billing. Price the financing and risk into the commercial offer where lawful and commercially sensible. Create a payment-term approval matrix Customer typeDefault termApproval needed New or unverifiedAdvance or depositSales head for exceptions Established, clean historyNet 15 or Net 30Within approved credit limit Strategic accountNegotiatedFinance approval Previously overdueAdvance or reduced limitFounder or finance head This stops each salesperson from inventing a credit policy during negotiation. Do not wait until the due date to start collections A simple sequence works better: At invoice: send invoice, PO reference and payment instructions. 7 days before due date: confirm the invoice is accepted and booked. 2 days before due date: send a short reminder. Due date: confirm payment status. 1 to 3 days overdue: contact the responsible AP person and customer owner. 7 days overdue: escalate under your credit policy. The key question before due date is: Is anything blocking this invoice from being paid? Track four numbers every week Total receivables. Overdue receivables. DSO or average collection days. Receivables above approved credit limits. For a small business, this weekly view is often more useful than a detailed report opened once a quarter. Common mistakes Giving 60-day terms because a large customer asks for them. Setting payment days without a credit limit. Starting expensive custom work without a deposit. Letting sales change terms without finance approval. Using invoice date, delivery date and acceptance date interchangeably. Following up only after an invoice is overdue. Continuing new deliveries while old invoices keep ageing. A 30-day payment-term reset Week 1: List every customer, current term, open receivables and average payment behaviour. Week 2: Assign credit limits and default terms. Identify customers whose actual behaviour is worse than the contract. Week 3: Update quotation, PO acceptance and invoice templates. Add a clear approval process for exceptions. Week 4: Start a weekly receivables meeting. Review overdue invoices, blocked invoices and customers above limit. FAQs Is Net 30 always better than advance payment? No. It may make selling easier, but it increases working-capital exposure. Choose it based on customer quality and deal economics. Should every customer get the same terms? No. Credit should reflect risk, history, order size and how much cash you must commit before collection. Can a contract with a micro or small enterprise specify 60 days? For the delayed-payment framework under Section 15 of the MSMED Act, an agreed period cannot exceed 45 days from acceptance or deemed acceptance for a qualifying supplier. Review the exact facts and documentation with your adviser. What is the fastest improvement most founders can make? Stop treating payment terms and credit limits as separate decisions. A 30-day term with unlimited open orders can still create a large exposure. What to do today Take your ten largest customers. Write down their contractual term, actual average payment time, current outstanding balance and approved credit limit. If you cannot fill all four columns, your business is giving credit without a complete credit policy. Sources Micro, Small and Medium Enterprises Development Act, 2006 Business Standard, MSME payment-rule explainer