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  1. 1. Terms of Sale Classified Prepayment Terms When the seller insists on payment before delivery of the goods, there is no credit risk. Payment may even have to be made by cashier’s check, rather than the buyer’s check. A cashier’s check is a check written on a bank’s account; not the buyer’s account. The buyer has already given the bank cash in exchange for the check. Prepayment terms may be required when: • Buyer does not have good creditworthiness. • Buyer’s financial situation has deteriorated and seller now no longer has confidence in buyer’s ability to pay. Some prepayment terms: • CBD – cash before delivery. The least risky. Payment must be received before the goods are even shipped. • COD – cash on delivery. Delivery won’t be completed until payment is made. But seller bears the risk that payment may not be made and will have to pay shipping both directions. Payment must be in currency or cashier’s check. • CWO – cash with offer. Send the check with the order. Goods sent after check clears. • CIA – cash in advance. • SD-BL – sight draft (a check) with bill of lading attached. The bill of lading transfers title and possession to goods but will not be delivered until payment on the sight draft is made at a bank.
  2. 2. -2- Cash Terms Payment is expected within a reasonable time after the bill arrives, say, 10 days. That gives time for the buyer to inspect the goods but also means seller gets the cash soon after delivery is made. It is still the extension of credit for a short time and there is still a risk of default. Bill-to-bill terms. Payment must be made for a previous shipment of goods when the next regularly scheduled shipment arrives. Net Terms Payment is required at the end of the credit period. No cash discount is allowed. Net 30 days means payment is due within 30 days of receipt of the invoice (the bill). Ordinary Terms Many industries or trades will have typical terms, such as “2/10 net 30.” This means the entire balance is due within 30 days of the invoice, but the buyer can take a 2% cash discount if the bill is paid within 10 days. Buyers should always take cash discounts, even if they have to borrow money to do so (unless the loan interest rate is very high). “2/10” represents a 36.7% annual interest rate. Example: $100 due in 30 days. $98 if paid in 10 days. Buyer will pay $2 to use $98 for 20 days. $2 360* Annualized return = -------------- x -------- x 100% = 36.7% $98 20 *37.2% if 365 used
  3. 3. -3- Single-Payment or Lumped-Order Terms A buyer makes purchases frequently during, say, a month. The seller sends an invoice or bill at the end of the month, EOM, (or some other regular date in the month) covering all the purchases. This is particularly useful when the purchases are small and the preparation of an invoice for each purchase would be cost- ineffective. Cash discounts are allowed. The accumulation period may be only half a month (middle of month, MOM) and bills sent twice a month. Proximo means next month. Example: 10th proximo means by the 10th of the next month, regardless of whether that is 30 days after the receipt of the invoice or not. When a business bills monthly, the distinction can be lost, e.g., 2% 10th proximo, net 30. Special Datings Terms “Season” dating. Used for highly seasonal merchandise. Buyer can buy goods well in advance of usual selling season but not have to make payments until the goods are usually sold. The storage burden shifts to the buyer but the interim financing cost remains with the seller (compensated for later when goods are paid for). “Extra” dating. Allows cash discount to be taken any time before net due date. Example: 2$ 10-60 extra when the net is due in 70 days.
  4. 4. -4- ROG = receipt of goods. Terms start on the day the goods arrive rather than on the invoice date. AOG = arrival of goods. Terms start on the day the goods arrive rather than on the invoice date. Consignment Terms Sold on consignment means goods are being sold on behalf of the original owner. Title never passes to the buyer for resale. Buyer does not have to pay for goods unless the goods are sold. The buyer is acting as an agent for the seller, not as a dealer in the product. Consignment terms may be used when the buyer does not want to accept the risk of not being able to sell the product. Consignment terms may also be used when the seller doubts the buyer’s creditworthiness and does not want to risk transferring title. Getting the merchandise back in case of default is much simpler if title remains with the seller.