Different Types of Supplier Payment Term

4 min readJul 27, 2022

As the economy continues to experience ups and downs, many procurement departments are modifying payment arrangements with a building material supplier in order to save money. While this may be advantageous for your small business, certain suppliers with credit concerns may be unwilling to negotiate revisions to contracts. The optimal situation for your business would be to investigate discount-offering solutions that benefit both sides.

To help you get started, we will present an overview of payment conditions for procurement, how to negotiate, the repercussions of late payments, and how to handle payment disputes.

Procurement payment conditions

Most businesses use a net 45-day payment term. This means that payment is due 45 days after the invoice date. There are terms and conditions that apply to all invoices received by a supplier upon receipt of a purchase order.

A payment period determines when an invoice will be received. In addition, if an invoice is missing information, the payment terms are calculated once the correct invoice is received.

Payment terms must be considered before a business decides to proceed with a supplier. A corporation must evaluate the financial repercussions and risks associated with a purchase agreement, such as cash flow issues. Consider your company’s short- and long-term objectives while making expenditure decisions. This ensures the success of business interactions with a provider.

Negotiating payment terms with a supplier should be a priority, with many advantageous conditions established.

Compared to other businesses, payment turnaround times are expected to be expedited in certain sectors. For instance, the majority of hotels have a payment term of 21 days, whilst other service businesses have a payment terms of 67 days. Additionally, where you conduct business can affect payment terms.

In addition, the truth is that purchase agreements might exist at several stages of the supply chain. Regarding the supply chain as a whole, the terms of the purchase agreement have a greater bearing on the connection. Below are the four most prevalent payment structures:

1. Advance payment

Payment in advance refers to a payment made prior to the supplier’s invoice date as an obligation to a business following the acquisition of goods or services. The balance due, if any, shall be paid as soon as the payment is made. These forms of payments are in contrast to deferred payments or arrears payments. In these instances, goods or services are delivered first and then paid for later.

Advance payments are reported as assets on the balance sheet of the company. When these assets are used, they are reported on the income statement for the period in which they are incurred.

Advance payments are typically made in two cases. They may refer to the sum of money paid before the contractually negotiated due date, or they may be needed before the goods or services demanded are obtained.

2. Letter of Credit

A letter of credit is an official bank guarantee. It specifies that a business must make payments based on certain financial conditions. Due to the fact that a letter of credit is normally a negotiable instrument, the issuing bank pays the beneficiary or any bank designated by the beneficiary. If a letter of credit is transferable, the recipient may delegate the right to draw to another entity, such as a corporate parent or a third party.

3. Documentary collection

The term “documentary collection” refers to the fact that the exporter receives cash from the importer in exchange for the shipping documentation. Shipping paperwork is essential for the buyer to clear customs and take possession of the goods.

Documentary collection is less popular than other types of trade finance, such as letters of credit and advance payment. It is less expensive than certain alternatives but also riskier, so it is often limited to transactions between parties that have established trust or are located in nations with strong legal systems and contract enforcement.

4. Open accounts

The method by which a seller ships products with payment instructions constitutes an open account. This document includes details from the seller’s invoice. This option is obviously the most advantageous for the importer in terms of cash flow and cost, but it is also the most risky option for an exporter. Due to tight competition in export markets, international buyers frequently demand exporters’ open account terms, as seller-to-buyer credit is more widespread abroad. As a result, exporters that are hesitant to issue financing risk losing a transaction to their competitors.

However, by utilizing one or more appropriate trade financing solutions, such as export credit insurance, the exporter can provide competitive open account terms while significantly lowering the risk of non-payment.

The items, along with all appropriate documentation, are transported straight to the importer, who has agreed to pay the exporter’s invoice by a certain date. The exporter must be certain that the importer will accept the shipment and pay on time and that the importing country is commercially and politically secure. Open account terms can help you acquire customers in competitive marketplaces, and they can be combined with one or more of the suitable trade financing approaches to reduce the risk of non-payment.

If you have been wondering about going forward for procurement of raw material on best payment terms , OfBusiness is your place to be.