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Payment Terms Guide for supplier selection
Business Development

Understanding Payment Terms: A Comprehensive Guide for Supplier Selection

By Linda Massi

3 minute read

Linda Massi By Linda Massi

3 minute read

When considering potential suppliers, it's vital to take payment terms into account. While they may not directly affect price calculations, payment terms significantly influence cash flow and collaboration risks.

 

In this article, we'll delve into the concept of cash flow, explore various payment terms commonly used, and provide insights on negotiating and combining terms to build strong relationships with your suppliers.

 

The most common types of payment terms are:

 

Understanding Cash Flow

 

Cash flow refers to the movement of money into and out of a business. When making purchases, you may have the option to pay upfront or defer payment for several months. By delaying payment, you gain the ability to await customer payments, invest your funds, or avoid taking loans from banks.

 

Moreover, cash flow has an impact on the level of risk involved. Once payment has been transferred, the risk of missed payments is eliminated. Conversely, if you pay the supplier upfront, there is a risk of them failing to fulfill the order.

 

 

Common Types of Payment Terms

 

  1. C.A.D. (Cash against Document): In this payment term, the supplier instructs a bank to transfer shipping and title ownership to the buyer (importer) upon payment. The buyer becomes the owner of the goods only after fully paying the accompanying bill of exchange.

  2. C.O.D. (Cash against Delivery): Under this arrangement, the buyer pays for the goods at the time of delivery. If the payment is not made, the goods are returned to the seller. The buyer can use cash, certified checks, or money orders as specified in the shipping contract.

  3. L/C (Letter of Credit): A letter of credit issued by a bank guarantees the payer's (buyer's) timely and accurate payment. If the buyer fails to fulfill their obligation, the bank is liable to cover the full or remaining payment amount. Due to the complexities of international trade, such as distance, varying laws, and unfamiliarity between parties, the use of L/C has become vital in securing transactions. It's important to note that banks charge a standard fee (approximately €200-300) for issuing an L/C.

  4. T/T Payment (Telegraphic Transfer): T/T payment involves the electronic transfer of funds between banks. The sending bank often levies a transfer charge, which may also apply to the receiving bank.

  5. Prepayment: Some suppliers may require a prepayment when an order is placed. This serves to secure their cash flow and covers the costs of materials needed to fulfill the order.

  6. Credit: In certain cases, suppliers offer credit terms, such as 30 or 60 days credit from the invoice date (varying from the delivery date). These terms are often denoted as 'NET' and provide buyers with a specified period to make payment.

Negotiating and Combining Payment Terms

 

Both you and the supplier have distinct interests regarding payment terms. Suppliers seek payment assurance, while buyers aim to maximize credit availability for improved cash flow. It's crucial to negotiate payment terms with your supplier, exploring combinations that strike a balance and align with the needs of both parties. For instance, you could agree on a 30% prepayment, 50% C.A.D., and 20% 60 days NET arrangement.

 

In conclusion, understanding payment terms is crucial when selecting suppliers. By comprehending different types of payment terms and their impact on cash flow and risk, you can make informed decisions. Remember to negotiate terms with your suppliers to reach a mutually beneficial agreement. Building strong relationships with suppliers through effective payment terms is vital for success in the apparel industry.

 

Learn more about fostering robust supplier relationships and enhancing your business's performance.