Payment Terms
Payment terms in really simple language, so you can understand it properly. Also given video link in Hindi for easily understand.
This topic is important for whose interested to make carrier in Supply chain and Logistics/Accounting. This is a complicated topic but there is given example will help you to proper understand.
Also video link is mentioned below as a presentation for more details. You can check it.
First You need to understand what is payment terms and why we have to follow and use this terminology & Standard in Logistics and Supply Chain.
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| Payment Terms Process |
Suppose you have a business in flower sector and this is a corporate business And your corporate office situated in Delhi India.
You want to buy some raw materials from flower manufacturer who is situated in Mumbai India. In this process. You will be consider as a buyer and manufacturer as a seller during transaction.
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Before come to the payment terms buyer seller need to be discussed other terms and conditions such as what is price of raw material and what is the lead time means How many days your raw material will be ready for me. After all these discussion then they moved to the Payment terms.
Payment terms definition in one line is 'How buyer will pay to seller'
Payment terms also known as invoice terms.
There is lot of payment terms is exist but only few are most common ans generally being used in supply chain.
1- 100%Advance Payment-
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This terms is mostly used in corporate sector but not in cash. This transaction took place digitally.
In this payment terms Seller will provide the PI means Proforma Invoice to Buyer where is mentioned the bank details of buyer and part prices and conditions, IGST, lead time, delivery terms etc.
If the all terms are as per agreement and acceptable, then Buyer will pay 100% amount to seller's account and share transaction details to seller, that's it. In case of international transaction a we can say Buyer will share the swift details.
Seller will confirm payment receipt to buyer and execute this order. Once lead time completed then seller will share the packing details and invoice to buyer and dispatch the material to the buyer and this process will be complete.
DO YOU KNOW HOW EUROPEAN COUNTRIES CALCULATE THE LEAD TIME. :They calculate weeks not day. For example - they will say your order will be ready CW 4 means (Calendar weeks 4 means 4th week of January) "
2 - 60% advance
This payment terms means all process will be the same as 100% but buyer will pay only 60% amount in advance and rest amount will pay as per their agreement. There is two possibility-
1st buyer have to pay rest amount once shipment ready to dispatch or
2nd buyer have to pay rest amount once shipment or material received at their factory.
It could be 30%, 40% 50% whatever Buyer & Seller agree.
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3 - 30 DAYS NET
The second and commonly used 30 days net or 60 days net or 90 days net.
Means buyer will pay after 30 days of receipt of material or 60 days or 90 days as per agreement.
Its also known as credit order.
Please Note- We have noticed some are doing misused of this terms. They negotiate only 30 days. But there is two meaning for this -
First is Buyer will pay after 30 days from receipt of material and Second is buyer will pay 30 days from the date of invoice.
This is credit order so seller make sure 30 days from the date of invoice and 30 days receipt of Material. We strongly suggest you should go with the date.
For example - Suppose in case of international transaction and seller chooses the payment terms 30 days from the receipt of material. And seller dispatch the shipment accordingly. Shipment reached in Indian Airport. There is need to clearance. If clearance is in buyer scope and they delayed in clearance so Seller also get delayed in Payment receiving. So fault is buyer then why Seller bear delayed.
DO YOU KNOW IF DELAYED IN CUSTOM CLEARANCE THEN CLEARANCE HOUSE IMPOSE PENALTY FOR THIS DELAYED.
Seller should confirm this with buyer before dispatch the material otherwise payment will be delayed.
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4 - LC (Letter Of Credit)
Third and most secure payment terms is Letter of Credit.
Its mostly used for the big orders.
Its also used in import/export or when buyer seller don't know to each other or security.
First steps will be same as given above.
Buyer will issue the LC copy by their bank, and send it to the seller. its a document to buyer to Seller through their Bank.
In this transaction Bank also include as a guarantee.
In simple language Buyer will pay to the bank and instructed them, 'when Seller ship this material and followed all terms and condition full filled, and documents provided, then pay the same amount to seller.
Bank will charge the fees for LC. As bank is involved here so we often seen this terms used in only high value shipment.
If any thing or T&C not completed by Seller then bank will hold the amount and wait for complete all condition which agreed with buyer.
Do you know in LC documents. There is mentioned time line for shipping the material. Seller have to delivered the shipment before latest date of shipment. If seller couldn't dispatch material before this date then Buyer have to amend the LC and take new latest date of shipment.
Please Note - No need to reestablish the LC for delay in shipment it can be amend.
If you have any question regarding payment terms then comments and mail us. We will help you on this. If you have any suggestion also let us know we will consider the same.
These Payment terms often used for Domestic and International transaction.
For the Hindi Lerner you can visit below video link for more details-
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