Supplier-Payment Terms

Supplier-payment terms are the conditions in a purchase contract or order that determine when a buyer must pay a supplier, how much at each stage, by what method and against which events or documents. They can include an advance deposit, payments tied to production milestones, payment on inspection or shipment, a credit period after delivery, and a deadline for the final balance.

Payment terms divide risk and financing cost between the two parties. Paying early protects the supplier and burdens the buyer's cash flow; paying late does the reverse. In cross-border trade they also determine which documents the banks will see, and therefore how easily each payment passes compliance review.

Domestic and credit terms

In domestic business-to-business trade, terms are often written as "net 30" or "net 60", meaning the full invoice amount is due 30 or 60 days after the invoice date. An early-payment discount may be offered, as in "2/10 net 30": the buyer may deduct 2% if it pays within 10 days, or pay the full amount by day 30. Giving up that discount to keep cash for 20 more days is equivalent to borrowing at an annualized rate of roughly 37%, which is why treasury teams pay attention to such terms.

International trade terms

Cross-border terms are usually described by the payment method, in rough order of risk to the exporter:

• Cash in advance: the buyer pays some or all of the price before production or shipment.
• Letter of credit: a bank undertakes to pay the supplier on presentation of complying documents.
• Documentary collection: banks exchange shipping documents for payment or for acceptance of a bill of exchange, without guaranteeing payment.
• Open account: goods are shipped and invoiced, and the buyer pays on the agreed due date.

Manufacturing contracts commonly split the price into stages. A frequent pattern in Asian export trade is a 30% deposit on order, with the 70% balance due when the supplier sends a copy of the bill of lading, or before the original documents are released. Other contracts add a payment after a pre-shipment inspection by a third party, or hold back a retention of 5% to 10% until the goods are accepted. Each milestone should state the triggering event, the evidence required and the deadline. Milestones linked to arrival are exposed to shipping delays, for example when vessels must divert around a disrupted maritime chokepoint, which is one reason many contracts tie payment to shipment documents instead.

Example

A retailer orders $200,000 of furniture on terms of 30% with order, 60% against a copy of the bill of lading, and 10% thirty days after arrival. It pays a $60,000 deposit when it signs the pro forma invoice. When the goods ship, the supplier issues its commercial invoice and sends the bill of lading copy, and the buyer pays $120,000. After the goods arrive and pass inspection, the buyer pays the final $20,000. Each payment references the same invoice and contract, which helps the banks match it to the trade.

Payment terms are separate from delivery terms. Incoterms such as FOB or CIF define who arranges transport and insurance and where risk passes, but they say nothing about when payment is due. Contracts need both, and mismatches, such as an FOB sale where the buyer must pay in full before its own carrier has collected the goods, can leave one side exposed.

Banks reviewing an outgoing trade payment compare it with the contract terms. A payment that does not fit them, such as a large balance paid before any shipment evidence, a payment to an account in a third country or to an unrelated third-party beneficiary, or an amount that differs from the invoice, may prompt questions under trade-payment compliance procedures. These checks also guard against payment diversion fraud, in which criminals send buyers fake instructions to change the supplier's bank details. In countries with capital controls, advance payments above set limits may need approval or extra documents.

Because payment terms create gaps between shipment and cash, they drive demand for trade finance. Suppliers offering long credit periods can sell their receivables or use invoice discounting, traders holding stock in storage can pledge a warehouse receipt over the goods to borrow until the buyer pays, and large buyers can run supplier finance programs in which a bank pays suppliers early at a discount based on the buyer's credit. Buyers that extend their own terms to suppliers while offering early-payment programs are sometimes criticized for shifting financing costs onto smaller firms.