Terms of Sale: Examples

Terms of sale can be separated into different categories: prepayment, cash, net, and special. Regardless of the kind of terms used by a seller, they should be clearly communicated in writing and agreed to by the buyer. Prepayment Terms or Cash Terms also referred to as prepayment or closed terms, include payment before the transaction, at the time of the transaction, or in a short period after the transaction, usually no longer than 10-14 days. Cash terms do not ordinarily offer any discount. The short credit period allows the buyer sufficient time to examine and accept the merchandise. When cash terms requiring payment before the merchandise is delivered are offered, this is an indication that the seller does not wish to extend credit to the buyer. The following terms are prepayment terms, requiring payment before delivery:

• Cash in Advance (CIA)-  These terms require the buyer to make payment via one of the cash methods (wire, bank check, etc.) before an order will be shipped.
• Cash before Delivery (CBD)-  No delivery will be made until the buyer has made payment.
• Cash on Delivery (COD)-  These terms require payment to the carrier or the transportation company for the full invoice amount at the time of the delivery. There is the risk that the buyer will not accept the shipment, which means that the seller will have to bear the costs of freight charges to and from the buyer's location, preparation and packaging costs, and possible deterioration of the product.
• Cash with Order (CWO)-  These terms are offered when the seller requires payment before shipment can occur. The seller requires that a check be included with the order or that some form of cash payment be received at the time the order is placed.
• Bill-to-Bill terms-  These are also called drop delivery or load-to-load terms and require payment for the previous shipment when a new delivery is made. These terms are often found in lines involving weekly deliveries. Perishable foods sold to retail stores and gasoline sold to retail service stations are representative of this type of credit term.

Ordinary or Standard Terms

 Most businesses grant credit according to an industry-wide set of terms:

• Open account terms, also called ordinary terms, or standard terms include three elements: the net credit period, the cash discount and the cash discount period. 
• The net credit period is the length of time allowed for payment of the face amount of the invoice. When the net credit period is expressed as a net term or net 30, payment must be made in full within 30 days from the date of the invoice.
• Next month terms specify payment in the month following shipment. An example of a next month terms is: Net 10th prox. (proximo). This terms means that payment of the full amount of the invoice is due on the tenth day of the following month.
• End-of-Month (EOM) terms are usually offered for a consolidated bill that represents purchases and shipments of goods during the monthly period.
• Discount terms offer an inducement for the purchaser to pay ahead of maturity. A cash discount is offered off the invoice amount if the customer pays within a specified period of time called the discount period. It is usually expressed as a percentage but can also be stated as a dollar amount. For example, terms of 1%, 10/net 30 allow the buyer to deduct 1% from the face amount if the invoice is paid within 10 days. The amount of discount is calculated by successively applying the discounts to the quoted price. For example, terms of 10% and 5% on a $100 invoice would allow a 10% reduction of $100, then a 5% reduction on the remaining $90, for a net due of $85.50.

One final comment:  Existing customer relationships and the need to maintain these business relationships exerts the most important influence in deciding what payment terms are offered to customers both domestically and internationally.

Edited by Michael C. Dennis.  Mr. Dennis is an author and business credit consultant.  Please e-mail questions to  mcdennis13@yahoo.com