Payment Terms Defined

Payment Terms Defined

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Payment terms are an area in the RFQ process which is often overlooked or forgotten. Some commonly used payment terms would be Net 30 days, 2%/10 Net 30 days and there are many more.  (To help  get a better understanding we have included a glossary of payment terms you can download for free at the bottom of this post). So, what do these imply and is it something a Buyer should be paying attention to as part of the award process?

When generating a RFQ or RFP, most buyers will place the majority of their efforts on the product, FOB Point and other commercial aspects of the quotation and doing such is absolutely right but one evaluation point which is often overlooked or not considered in the overall award process are the payment terms. Buyers will often accept or assume the standard Net 30 days offered is not worth analyzing.

If the quotation value is only $10,000 it is likely not worth pursuing further, however, if you are tendering a large dollar agreement, a 1% or 2% early payment discount might be worth considering.  Of course, the accounting department will have the last say as they may not be able to meet the early liability or may not have systems in place to facilitate early payment when dealing with large dollar transactions.

Let’s quantify a proposed payment term of 1%/10 Net 30 (1% discount if invoice is paid within 10 days, otherwise the total amount is due in 30 days).

Example: A 1% early payment discount on a $50,000 invoice = $500 per month x 12 is $6,000 / year. Cash flow might be an issue with your company and some prefer to pay late rather than early but if you can make a case to identify potential savings we have found most prudent accounting types are all over it. In any event, discuss this with your accounting department before putting it on the table.

Seasoned professionals might dangle this carrot … the negotiation is almost complete and you are prepared to award,  the Vendor is in your office and has quoted a payment term of  Net 30 days which is their standard RFQ response, why not ask if they will agree to a 2%/10 net 30 days payment term? What this implies is the buyer will receive a 2% discount on the invoice amount if full payment is made within 10 days, otherwise  the total amount is due within 30 days.  If you succeed you have created an opportunity to save thousands of dollars over the course of the year. Not bad for a few minutes work! The following table illustrates the kind of savings which can be realized by implementing this process.

Amount Discount Savings Annualized Amount Discount Savings Annualized
5,000 1% 50 600 5,000 2% 100 1,200
10,000 1% 100 1,200 10,000 2% 200 2,400
15,000 1% 150 1,800 15,000 2% 300 3,600
25,000 1% 250 3,000 25,000 2% 500 6,000
50,000 1% 500 6,000 50,000 2% 1,000 12,000
100,000 1% 1,000 12,000 100,000 2% 2,000 24,000
150,000 1% 1,500 18,000 150,000 2% 3,000 36,000
200,000 1% 2,000 24,000 200,000 2% 4,000 48,000
250,000 1% 2,500 30,000 250,000 2% 5,000 60,000
300,000 1% 3,000 36,000 300,000 2% 6,000 72,000
350,000 1% 3,500 42,000 350,000 2% 7,000 84,000
400,000 1% 4,000 48,000 400,000 2% 8,000 96,000
450,000 1% 4,500 54,000 450,000 2% 9,000 108,000
500,000 1% 5,000 60,000 500,000 2% 10,000 120,000
550,000 1% 5,500 66,000 550,000 2% 11,000 132,000
600,000 1% 6,000 72,000 600,000 2% 12,000 144,000

Download our FREE Payment Terms Defined Template HERE >>> Payment Terms Defined