Terms of Sale Classified
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.
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
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).
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 $98 for 20 days.
Annualized return = -------------- x -------- x 100% = 36.7%
*37.2% if 365 used
Single-Payment or Lumped-Order Terms
A buyer makes purchases frequently during, say, a month. The
seller sends an invoice or bill at the end of the month, EOM, (or
some other regular date in the month) covering all the purchases.
This is particularly useful when the purchases are small and the
preparation of an invoice for each purchase would be cost-
ineffective. Cash discounts are allowed.
The accumulation period may be only half a month (middle of
month, MOM) and bills sent twice a month.
Proximo means next month. Example: 10th proximo means by
the 10th of the next month, regardless of whether that is 30 days
after the receipt of the invoice or not. When a business bills
monthly, the distinction can be lost, e.g., 2% 10th proximo, net
Special Datings Terms
“Season” dating. Used for highly seasonal merchandise. Buyer
can buy goods well in advance of usual selling season but not
have to make payments until the goods are usually sold. The
storage burden shifts to the buyer but the interim financing cost
remains with the seller (compensated for later when goods are
“Extra” dating. Allows cash discount to be taken any time
before net due date. Example: 2$ 10-60 extra when the net is
due in 70 days.
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.
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
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.