Payment terms are general terms and conditions that regulate the payment of the monetary debts of debtors in transactions. Payment terms include all terms and conditions relating to a buyer’s payment obligations under a sales contract and their methods of payment. Not only sales contracts, but also all obligations arising from which payment obligations arise contain payment provisions. This applies in particular to continuing obligations such as rental, lease, leasing, credit, electricity supply or mobile phone contracts. Depending on the bargaining power, the terms of payment are determined by the supplier or the customer or negotiated between the two. Payment terms have a significant impact on customers’ purchasing and payment behavior.
The terms of payment include, in particular, the indication of bank details, method of payment (cash, prepayment, deposit, credit note procedure, central settlement, cash on delivery, bank transfer, direct debit, cheque or electronic money, payment in instalments, partial payment), due date, Payment term, discount and discount regulations. Although the retention of title is a condition of delivery, it is considered to be the supplier’s credit security for the payment term granted.
These payment terms contain an order of precedence that affects the supplier’s payment risk. Prepayment and deposit reduce the supplier’s risk and are used for new customers or customers whose creditworthiness is not in good condition. Even products/services with high production costs (large machines, ships, aircraft, buildings) are often financed by advance payment or advance payments from the customer. Step-by-step payments such as cash payments or cash on delivery represent an equal sharing of risk between supplier and customer. The highest payment risk for the supplier is the payment in installments and a payment term.
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The supplier or creditor providing the payment terms can thus directly influence its liquidity. The most favourable payment term for him, the advance payment, improves his liquidity before he has even started production or delivery. The most unfavourable is the granting of a payment term and represents a customer credit for the supplier and thus a credit risk. Both terms of payment are therefore associated with an upfront payment risk, which must be borne by the customer in the case of the advance payment and by the supplier at the time of payment.
A widely used payment term is the target purchase (payment term), which occurs as a commercial custom in the following forms, for example:
- 10 days – 3%, 30 days net (up to ten days after the invoice date, the customer can deduct 3% discount, otherwise payment is due after 30 days without deduction);
- 7 days – 2%, 20 days net;
- immediately – 2%, 14 days net;
- 2% on the 15th of the 2nd month of the following month.
The value period arises from the fact that the invoice is dated (valued) to a certain point in time after delivery. The discount period indicates the deadline until which the discount may be deducted from the invoice amount. The target deadline (the payment term) indicates the deadline by which the invoice amount is due at the latest without deduction of discount. Within the value and discount period, the supplier credit is granted free of charge, so that it makes economic sense for the customer to pay the invoice on the last day of the discount period after deduction of the discount.
