Payment terms are the conditions and parameters of payment for an item or service, set by the seller for the customer.
These will include such considerations as whether the payment can be made in installments, by credit or cash, if interest will be charged, and when payment must be completed.
There are many different types of payment terms. They will vary based on a number of factors, such as the product being acquired, the nature of the relationship between the seller and the customer, the volume of purchase, whether or not credit is extended, and other factors.
It is a good business practice to be upfront and detailed about payment terms to avoid confusion, especially if the terms of payment are unconventional or involve an extension of credit that may expose the business to a certain level of risk.
It is important for the seller and the customer to be clear on payment terms form the point of purchase.
Typically, the payment terms will be detailed in the product or service invoice, which will be provided at the point of the transaction when the product or service is provided. This will establish the payment terms at the earliest possible juncture, and it will clarify the expectations the business has for payment from the customer once the process has been initiated.
There are many different types of payment terms, and they will vary depending on a number of factors.
Some of the basic elements of payment terms are:
When payment is expected
Any conditions that are applied to payment, such as credit, interest, installments, etc
If the customer is to receive a discount
Any late fees that will be charged, how they will be calculated, and when they will be charged
The terms will be described in the invoice and will reference the above conditions. For example, an invoice will describe when payment is expected. Examples include:
Payment in advance
Due upon receipt (of invoice)
Due seven days after invoice
Due 30/60/90 days after invoice date
Due at the end of the month
Payment terms also describe the manner of payment, such as cash or credit. Each has many variations. For example, payments terms for cash payments may include:
Cash on delivery
Cash account, meaning the customer has an account that is conducted on a cash basis, no credit
Cash next delivery
Cash before shipment
Cash in advance
Cash with order
Credit payments have many variations, too. They include:
A letter of credit, which is a documentary credit confirmed by a bank, which is often used for export
Bill of exchange which is a promise to pay at a later date, usually supported by a bank
Monthly credit payment of a full month's supply
Monthly credit payment of a full month's supply plus an extra calendar month
Contra, which is a payment from the customer offset against the value of supplies purchased from the customer
Stage payment, which is a payment of agreed amounts at stage
Payment terms also describe any discounts that the customer may receive. Examples of discount terms include:
Accumulation discounts are discounts for large purchases
Coupons may have terms that involve certain quantities
Discount cards give certain customers or any customer a discount
Educational or student discounts, employee discounts, or military discounts
Preferred payment method discounts are given to customers who pay with cash, because it saves the fee the retailer pays on credit cards and because it avoids the risk of extending credit
Prompt payment discounts are often given by wholesalers or manufacturers to retailers
Rebates are refunds mailed to the purchaser after a purchase
Sliding scale discounts are calculated on the customer's ability to pay, which is more common with non-profit organizations
Seasonal discounts are given during a particular time of the year, typically during a “slack period” when sales are down
Trade discount are payments for functions such as shelf stocking, warehousing, or shipping.
Trade-in credit is a discount for something that is returned
Payment terms are an important part of communication between the business and its customers.
They serve to define and clearly articulate expectations once the transaction has occurred.
All transactions involve trust and good will between business and customer. This depends on prompt and reliable delivery of the product or service as well as an equally prompt and reliable payment for what the customer has received.
Payment terms serve to reinforce that trust and goodwill, and they ensure that payments meet the expectations of the business.
The business that is providing the product or service always decides the payment terms and will indicate the terms on the invoice.
The business will determine the payment terms based on a number of factors, depending on the product, the volume sold, the customer and the nature of the relationship with the business.
Payment terms are often written in the form of commonly used acronyms and abbreviations. Some examples include:
PIA: Payment in Advance
Net 30: Payment due 30 days after invoice date
2/10 Net 30: Customer receives a two percent discount if Net 30 bill is paid in 10 days or less.
EOM: End of the Month
COD: Cash On Delivery
CWO: Cash With Order
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