Terms of Trade

Terms stated in writing (commercial contract) upon which goods and services are sold (indicate when the invoice should be paid). Only few organizations pay early whereas most companies are far too late. It is the main objective of the credit control department to get its customers to stick to the payment terms stated in the contract. Sellers are keen on payments made on a cash-in-advance basis. However, customers are very reluctant to pay up-front unless it's a one-time order they place or are widely known as bad payers and pro forma payments is a "punishment" for them and a provision for bad debts for the supplying company. Payment terms mostly depend on the size of the business and the goods/services supplied. The most common (and desirable) terms are those referred to as open accounts which means the customer does not need to pay for the goods for some time. In most industries usual payment terms are 30 day net. This implies the customer is expected to pay within 30 days from invoice date. Food companies tend to have shorter payment terms (7-10 days) whilst machinery manufacturers have longer terms (even up to 180 days).

• Discounts for early payment - in order to encourage early payment, companies offer a discount for prompt payment. The discount is linked to the payment terms and one of the example of this kind of "bond" are terms defined as 2/10 net 30. This means that payment is expected to come within 30 days plus if the customer pays within less than ten days can deduct 2% discount. The problem with discounts for early payment starts when customers take them but don't pay early as stated by payment terms.