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Terms of Sale
The expression "terms of sale" is frequently used to mean the terms of payment. A "term" is any condition in a sales contract. In a sales contract, a term can refer to an inspection clause, a clause detailing a sales rebate program, any return privaleges the buyer might have, the seller's product warranty, etc. It would be more precise to suggest that the terms of sale dealing with the time and method of payment should be called "terms of payment."
Terms of sale can be used to help manage credit risk. The most extreme example involves changing a customer's payment terms from open account terms to COD terms. However, payment terms [also sometimes called credit terms] can be used more subtly to control risk. Here is one example:
Assume that a customer has a $10,000 credit line and net 30-day terms. Assume you are no longer comfortable with a $10,000 credit limit. Rather than simply reducing the credit limit to, say, $5,000, and potentially losing half of the business to a competitor, you could limit your risk by changing the terms of sale to net 15 days. The advantage of shortening the credit terms while offering the same credit limit is that the customer must pay faster, which should have the same effect as lowering the credit limit because faster payments reduces credit risk by reducing the average balance due.**
*Source: "Manual of Credit and Commercial Laws," edited by Charles M. Tatelbaum and John K. Pearson, available at the NACM Bookstore.
Edited by: Michael C. Dennis