Selecting payment terms

The terms that govern when you pay a supplier for the things you purchase can

have a big effect on the financial performance of your supply chain. Of course,

suppliers want you to pay them as soon as possible. But the longer you can wait

before paying your suppliers, the better it is for your company’s finances. A major

concern for any supplier is that a customer won’t pay an invoice, which is called a

default. Payment terms come in four main types:

» Payment in advance: Some companies want to have your money in their

hands before they provide you with a product or service. This eliminates the

risk of default,

» Payment on delivery: A company may ask its customers to pay as soon as

it delivers a product or service. With payment on delivery there’s a small risk

of default.

» Net payment terms: Suppliers may be willing to wait for you to pay them.

This is a form of credit called net payment terms. For example, a supplier may

ship an order and expect you to pay the invoice in 30 days, which is called a

net 30 payment term.

» Hybrid payment terms: Many supply chain transactions involve a combina-

tion of payments terms. Combining payment terms can help both companies

manage cashflow and risk. For example, a supplier may ask for a down

payment when an order is placed, a partial payment when the order is

delivered, and a final payment 30 days later

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