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What are Terms of Payment? Get to know the 4 main types here

term-of-payment

In a business, transactions are one of the most crucial elements, much like the lifeblood that keeps everything running smoothly. But have you ever wondered what actually makes transactions run smoothly? The answer lies in the Term of Payment.

In essence, the term of payment is an agreement between the seller and the buyer regarding how and when the payment will be made. If the term of payment is clear, the business's cash flow can remain healthy, and customers also have more flexibility when it comes to making payments. Simple, right? But the impact it can have on a business is huge!

Want to learn more about this and how it benefits your business? Keep reading until the end!

Understanding Term of Payment

A term of payment is an agreement that sets the conditions regarding the method, amount, and timing of payment between the seller and the buyer in a business transaction. This agreement is made to ensure both parties have clarity on their respective obligations, thus preventing conflicts in the future.

Types of Term of Payment

In business, understanding the types of term of payment is crucial to ensuring smooth transactions. Each type has its own advantages and risks, depending on the needs and relationship between the seller and buyer. Here are some of the most common types of term of payment:

  1. Cash Before Delivery (CBD)


    The buyer must make full payment before the goods or services are delivered by the seller. This system is often used to prevent the risk of non-payment.

  2. Cash on Delivery (COD)


    Payment is made directly when the goods are received by the buyer. This type is popular in retail or e-commerce transactions.

  3. NET EOM + D Days


    Payment is made at the end of the month (EOM), plus a certain number of days after. For example, "NET EOM + 10 days" means payment must be completed 10 days after the end of the month.

  4. NET D Days


    The buyer must settle the payment within a specific period. For example, "NET 30 days" means payment is due within 30 days after the invoice is issued.

How Long is the Term of Payment?

The duration of the term of payment varies depending on the agreement between the seller and the buyer. Factors influencing this include the type of industry, the business relationship, and company policies. Generally, the duration of the term of payment ranges from 7 to 90 days. The longer the duration, the greater the risk of payment delays for the seller.

Purpose of Term of Payment

After understanding the definition and types, let's take a look at the purpose of the term of payment:

  1. Enhancing Consumer Appeal


    Offering flexible payment options can be a strategy to attract consumers. Some consumers are more likely to purchase products if the payment method is convenient and attractive.

  2. Managing Company Finances


    The term of payment helps companies maintain stable cash flow. With clear arrangements, companies can plan their expenses and income better, thereby maximizing profits.

Also Read: What is a Payment Gateway? Flow, Benefits and How it Works

Example of Term of Payment

To provide a clearer picture, here's an example of a letter related to term of payment:

Dear Mrs. Rina Susanti
Jl. Melati No. 45
Palu, Sulawesi Tengah

Dear Sir/Madam,

We would like to remind you that on November 10, 2022, we sent an invoice numbered 987GTRB12 related to your purchase of kitchen equipment, with a total amount of IDR 500,000. Based on the agreed term of payment, the payment should be made within 14 days after the invoice date.

However, as of now, we have not received payment from you. Therefore, we are sending this letter as a reminder and attaching a copy of the invoice along with the payment details that need to be settled immediately.

We appreciate your attention and cooperation in settling the payment. If you need to discuss this matter further, please contact us at 0813-7890-1234.

Sincerely,
Anton Wijaya
PT. Solusi Rumah Idaman

Also Read: What is Full Payment and Why is it Important to You?

Conclusion

The term of payment is a critical element in business transactions, governing the method and timing of payments between the seller and buyer. By understanding types like Cash Before Delivery and NET D Days, companies can tailor their payment methods to meet business needs and consumer preferences. Moreover, the term of payment helps maintain the financial stability of the company.

With proper management, the term of payment not only benefits the company but also provides a more convenient experience for the consumers.

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