Selling Wholesale: Payment Terms You Need to Know
Payment terms outline how, when, and by what method your customers or clients provide payment to your business.
Payment terms are typically associated with invoice payments. For many food entrepreneurs, this term will not cross their path. However, for others, they involve an agreement that sets your expectations for payment, including when the client needs to pay you and the penalties for missing a payment.
I learned about payment terms the hard way. I provided pies to the now-defunct Healthy Home Market in Charlotte, NC, and did not address during the beginning of the relationship the payment terms for the pies they would purchase. Rookie move.
I paid the price since their terms were Net-45, which meant the market could pay within the next 45 days. They did not pay. Then, I learned they had an additional 15 days (fine-print) to issue the payment.
I had to renegotiate payment terms since, waiting 60 days for payment was not anything I was willing to do. Luckily, the market was willing to do a Net 30 and stick to it, but I can tell you this is a situation you do not want to find yourself in.
Net Payment Terms
Net Payment Terms will vary by account, but these are accounting payment terms for when payment is due and if a corresponding discount is available, set by the retailer. These are more typical for larger accounts than dealing with a local store.
For example, “Net 30” means the retailer sets their payment due date 30 days after receipt of goods.
“1/10 Net 30” means they get a 1% discount if pay in 10 days or payment is due 30 days after receipt of goods.
For small businesses, these terms can be difficult especially when starting out and cash is tight.
Another point to keep in mind (and get clarity on if your product is accepted at a new account – yay) is that large companies often have certain days of the week they cut a check.
Yes… it’s what you think. So if your Net 30 payment is due on a Wednesday….but they only cut checks on Tuesdays, then yeah – you’re waiting almost another week until the check is cut and sent out.
So often for Net 30 terms, it could take 40-45 days until snail mail lands in your mailbox. Just one more reason understanding your cash flow is so important.
There may even be times when you need to:
- Check your customers’ credit history to check their creditworthiness with paying on time.
- Confirm with your customers whether the terms start when your business starts shipping the goods to them or when they have received your products.
Another Payment Term to Consider
Proforma Or Pre-ship
Proforma is when your customer pays for your products when they are ready to be shipped and upon receiving their payment, your business will send the products to them immediately.
How is this term useful?
This term is especially useful when dealing with first-time customers. This is often used when you are unable to determine your customer creditworthiness and are unsure if your customers can pay for their products. Setting this term for these customers ensures that you receive money for your products.
Over time, once you have built up your relationships with your customers, you can set more favorable terms for them.
The last term is Cash On Delivery (COD)
Cash on delivery, sometimes known as collect on delivery, is when your customer pays for goods upon their delivery rather than in advance.
This payment method is not only restricted to paying by cash but can also include payment by credit card, e-check, wire transfer, or online service payment.
How is this term useful?
While this is not a common term used in wholesale, sometimes COD can serve as the middle ground between a buyer’s and wholesaler’s interest.
Buyers tend to prefer to buy on credit, but a wholesaler might be unwilling to sell on credit due to a lack of resources to follow up with the payment or trust issue. Wholesalers tend to prefer pre-payment, but buyers might not be willing to pay upfront due to trust issues.
In this instance, COD can be used to ensure that both parties benefit with the wholesaler getting paid for their products and the buyer getting the products both at the same time.
As you can see, managing wholesale payments can be tricky with each customer having their different payment terms. If you need help managing your customer’s payments, and you’re not sure what will work best, review payment terms with a legal authority.