When choosing a supplier, payment terms are important to consider. Even though they might not directly influence the price calculation, they impact the cash flow and the risk you have of collaborating with different suppliers.
What is Cash Flow
Cash flow is defined as the amount of money getting in and out of a business. When you buy something, you might have to pay for it upfront or months later. The more you postpone your payment, the more you can wait for customers to pay you, invest the money, or avoid getting a loan from the bank.
Additionally, cash flow influences risk. If the money has been transferred, there is no fear of a missed payment. On the other hand, once you have paid the supplier, there is a risk they might not fulfill the order.
Types of payment terms
The most common types of payment terms are:
C.A.D. – Cash against document
Payment terms in which an exporter, in this case, the supplier, instructs a bank to hand over shipping and title to the importer at payment. Until the importer, which is the company, fully pays the accompanying bill of exchange, they will not own the goods.
Bill of Exchange: A binding agreement by one party to pay a fixed amount to another party on a predetermined date.
C.O.D. – Cash against delivery
With this type of transaction, the recipient pays for the good at the time of delivery. If the purchaser does not make the payment, the goods will be returned to the seller. The recipient can pay by cash, certified check, or money order, depending on what is stipulated in the shipping contract.
L/C – Letter of Credit
A letter from the bank guaranteeing the punctuality and accuracy of a payer. If the buyer is unable to comply, the bank will be required to cover the full or remaining amount of the agreed payment. Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of these payment terms has become an important aspect of international trade.
Note that the bank will charge a standard fee for making an L/C (approx. €200-300).
An electronic means of transferring funds. A transfer charge is often charged by the sending bank and, in some cases, by the receiving bank.
Some suppliers might ask for a prepayment when you place the order. This gives them security and cash flow to order materials needed to produce the order.
In some cases, you will be able to get credit from the supplier. For example, 30 or 60 days credit after the invoice date. This will vary from the delivery date).
Credit is referred to as ‘NET’.
Negotiating and combining payment terms
You and the supplier have different interests when it comes to payment terms. The supplier wants to ensure they receive the payment, and you want to get as much credit as possible to improve your cash flow.
It is essential to negotiate the payment terms with the supplier and you can combine different ones until you reach a compromise that fits you both.
For example, you could settle on 30% prepayment and then 50% CAD and 20% 60 days NET.
There you go! A quick guide to the most common types of payment terms used in the apparel industry.