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Payment Terms

What are Payment Terms?

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.

How Are Payment Terms Described?

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

  • Disability discounts

  • 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

FAQ

Why Are Payment Terms Important?

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.

Who Decides Payment Terms?

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.

Are There any Special Acronyms for Payment Terms?

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

Accounts Receivable Automation Software

Request a demo and we'll show you exactly how our accounts receivable automation software can help you maximize working capital in a unified platform for collecting cash, providing credit, and understanding cash flow.