Payment terms
Payment terms define when and how a buyer must pay for goods or services received. Terms specify the time window for payment, any discounts for early payment, and sometimes the payment method. Payment terms significantly affect cash flow for both buyers and suppliers and are often negotiable as part of commercial agreements.
Examples
Net 30 terms: Standard terms requiring payment within 30 days of invoice date. The buyer has 30 days to process the invoice and remit payment without penalty.
2/10 Net 30: Terms offering 2% discount if paid within 10 days; otherwise, full payment due in 30 days. The early payment discount incentivizes faster payment in exchange for a price reduction.
Payment on receipt: Terms requiring immediate payment upon receiving goods or invoice. This reduces supplier risk but may not be practical for buyers with invoice processing cycles.
Definition
Payment terms balance competing interests. Buyers prefer longer terms to preserve cash and reduce working capital needs. Suppliers prefer shorter terms to receive payment faster and reduce credit risk. Negotiated terms reflect relative leverage and relationship dynamics.
Standard terms vary by industry and region. Net 30 is common in many industries, while construction often uses longer terms, and some industries operate on shorter cycles. Understanding industry norms provides negotiation context.
Payment terms affect total cost. Longer terms provide implicit financing value to buyers. Early payment discounts represent significant annualized returns that may justify accelerated payment. Suppliers may price differently based on expected payment timing.
Payment term compliance matters for supplier relationships. Consistently paying later than terms damages relationships, may trigger credit holds, and can incur late fees. Procurement should ensure payment processes support committed terms.
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