Payment terms are the conditions under which a buyer agrees to pay a seller for goods or services. These terms specify the time frame within which payment is expected and any discounts or penalties that may apply. Common payment terms include:
1. **Net 30, Net 60, Net 90:**
- "Net" followed by a number (e.g., Net 30) indicates the number of days within which the buyer should make the payment after the invoice date. For example, Net 30 means payment is due 30 days from the invoice date.
2. **Cash on Delivery (COD):**
- Payment is made at the time of delivery of the goods. This is common in retail and for certain types of transactions.
This type of payment term is sometimes abbreviated as "Net 0" or "COD" (Cash on Delivery), where the payment is required on the same day the goods are received. Due on Receipt terms are often used for transactions where immediate payment is customary or practical, such as in certain retail settings or for online purchases
3. **Cash in Advance (CIA):**
- The buyer makes payment before the goods or services are delivered. This is often used in international trade or for custom-made products.
4. **Payment on Receipt:**
- Payment is made immediately upon receipt of the goods or services. This is similar to COD but may include digital or remote services.
5. **Advance Payment:**
- A partial payment is made before the goods or services are delivered, with the remaining balance due upon completion or delivery.
6. **Installment Payments:**
- The total amount is divided into several payments over an agreed-upon period. Each installment has a due date, and payments continue until the full amount is settled.
7. **Discounts for Early Payment:**
- A supplier may offer a discount if the buyer pays the invoice before the due date. Common terms include "2/10, Net 30" (a 2% discount if paid within 10 days, otherwise net amount due in 30 days).
8. **Letter of Credit (L/C):**
- Common in international trade, a letter of credit is a financial instrument issued by a bank, guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount.
9. **Payment on Shipment:**
- Payment is made when the goods are shipped but before they reach the buyer. This is often used in international trade.
10. **Consignment:**
- The buyer pays the seller only after the goods are sold. Until that point, the goods remain the property of the seller.
11. **Open Account:**
- The buyer is allowed to pay at a later date, typically within a specified period, without any specific payment terms mentioned.
It's important for businesses to clearly communicate and agree upon payment terms with their customers or suppliers to avoid misunderstandings and ensure a smooth financial transaction process. The choice of payment terms can vary based on industry practices, the nature of the transaction, and the relationship between the parties involved.
