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Common Invoice Payment Terms You Should Know

Topics: Finance, Credit & Payments, Management

We've compiled a reference list of commonly used invoice payment terms and abbreviations every business owner should know. Terms have been arranged alphabetically.

1MD - Monthly credit payment of a full month's supply.
2MD - Monthly credit payment of a full month's supply plus an extra calendar month.

Bill of exchange - Also called a draft. This is a short-term unconditional order involving three parties. The first party (drawer) is the goods supplier, who addresses the bill to the second party (drawee), the buyer. The bill requires the buyer to pay immediately (site draft) or at a fixed future date, a set sum of money to a third party (or bearer of the bill).

CBS or CBD - Cash before shipment or cash before delivery. This scenario allows the goods producer to take a down payment before creating the product. The down payment helps reduce some risks involved with creation of the product. The balance must be made before the product will be shipped to the customer.

CND - Cash Next Deliver. Used when delivery of a specific good or goods is made regularly, such as weekly or monthly. The current delivery must be paid before the next delivery is initiated.

COD - Cash On Delivery. Payment has not yet been made for the goods being delivered. Once delivered, payment is made. The sender assumes risks in this scenario. The goods might be damaged in transit and/or the recipient may decide not to pay.

Contra payment - Used when two companies owe each other. Usually each amount owed will be different. Rather than the companies sending full invoice payment to each other, the company owing more simply pays the difference between the two invoices. The might also be referred to as a contra asset or valuation allowance.

CWO - Cash with order. This option can work well with customers for whom credit is not being extended. In other words, there is no "Net X" involved. The customer will need to supply payment in full before any goods will be produced and shipped. Payment must first be received and verified with the bank.

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L/C - Letter of credit. Allows a supplier to perform services for a customer who does not have a credit history with the supplier. Suppliers take a risk when extending credit to new customers. One way around this is to have the new customer pay with a L/C. This requires the customer to get approval for financing through the customer's bank. If for some reason, the customer cannot pay the supplier, the bank will pay. This protects the buyer. On the hand, if the supplier doesn't come through, the customer is not out anything. They can in fact use the L/C with a different supplier.

Letters of credit can be complex. They involve the supplier, the supplier's bank, the customer, the customer's bank and various forms of documentation. Since the bank is a disinterested party in the transaction and not taking sides, they require various documentation to establish conditions under which delivery of the product has been met. Once those conditions have been met, the money behind the L/C is paid to the supplier.

Net X - Net X, where "X" is some number of days. "X" means an invoice is due X days after being received. The invoice may have some publication date as a reference and X days after that date is the due date. The following are examples:
Net 10 - Payment is due 10 days after invoice is received.
Net 30- Payment is due 30 days after invoice is received.
Net 60- Payment is due 60 days after invoice is received.
Net 90- Payment is due 90 days after invoice is received.
Net EOM 10 - Payment is due within 10 days of end of month.

A/B Net X - Another way Net might be stated is with a discount. "X" still applies as before. "A" is a discount percentage while "B" is the number of days the invoice must be paid within to receive the discount. Here are a few examples:
1/10 Net 30 - Receive a 1% discount is paid within 10 days. Otherwise, the invoice is still due 30 days after being received.
2/10 Net 30 - Receive a 2% discount is paid within 10 days. Otherwise, the invoice is still due 30 days after being received.
1/10 Net 60 - Receive a 1% discount is paid within 10 days. Otherwise, the invoice is still due 60 days after being received.
2/10 Net 60 - Receive a 2% discount is paid within 10 days. Otherwise, the invoice is still due 60 days after being received.

PIA - Payment in advance. Similar to CWO. This arrangement requires payment in full before any goods or service will be delivered. Payment can come in the form of a letter of credit from a bank. This can also mean an acceptable guarantee of payment.

PP or Stage Payment - Progress payments. Used when work is ongoing for a long period of time, as in the construction industry. Predetermined milestones or stages are set before the project begins. Once a milestone is reached and approved, a payment is made. Upon completion of the project, the balance is paid out. It is common for penalties to be applied when milestone dates slip.

RD - Rolling deposit. Similar to CWO, this arrangement allows customers to receive goods but with restrictions on payment. It allows you to monitor a customer's payment behavior before extending additional credit. The way it works is that a customer will supply receipt of a deposit that covers any credit limit you've offered them. The deposit is like a secured credit card. The customer is able to place orders that draw on their secured credit. There is usually no interest paid on the deposit.

Understanding these B2B payment terms can help you establish new policies in your credit department along with offering various payment options to customers. Especially new customers who may not have a thorough credit history. Rather than turning them away, you now have a few low risk options for increasing revenue while managing Days Sales Outstanding.

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