Wholesale Payment Terms

There are several standard wholesale payment terms like prepayments, extended payments, advance deposits, consignment cash on delivery and credit card payments. This article discusses these payment terms and suggests their ideal application(s) and best practices.

Prepayments

Prepayments aka 'proforma' or 'pre-ship' terms are ideal for first time orders, especially when the buyer's stability is uncertain as may be the case if a buyer's business has been operational for a limited period, like under 1 year. Note however that some companies, even well established one that are owned by managing companies or have separate accounting departments are not always able to make prepayments. In such cases, you may reduce the delay by building a relationship with the buyer.

DOs & DON'Ts

• Use for first time orders (even when credit has been approved)
• Use for companies with which you may have trust issues like new companies whose operational success is uncertain.
• Use if you lack the (human, time or other) resources to follow up on credit sales.
• Build a working relationship with the person(s) responsible for making payments.

Extended payment terms

'Extended payment terms': net D days (like net 30, net 60, net 90) is a very typical payment term. It gives the wholesale buyer (the retailer) D days, usually after delivery (or shipment) to pay for the products. Since wholesale orders tend to be 'large', it is designed to allow the retailer a chance to generate cash flow from selling your product so (s)he can pay you. Consider the turnover rate of the product. For instance, the period should allow the buyer to at least break even. Even when you decide on these payment terms, consider requesting the following.
Prompt payment discounts x/a net D like 2/10 net 30 may encourage speedier payments as it grants a 2% discount if the buyer pays within 10 days, rather than wait until the full 30-day extended payment period.

DOs & DON'Ts

• Use for larger sales. Consider requesting pre-payments for 'small' sales.
• Use for larger, better established businesses. In fact, you may have no choice with very large companies like Amazon and Walmart.
• Specify whether the extended period starts from shipment or delivery. Be sure to provide proof of the start date.
• Specify whether your notation refers to calendar or business days. Be sure to provide proof of the start date.
• Use 'prompt payment discounts' to encourage speedier payments. Example 2/7 cal net 30 cal meaning that wholesale buyers will be granted a 2% discount if they pay within 7 calendar days.
• Before applying these payment terms, request prepayment for at least the first order
• Request information regarding the person responsible for payments
• Request proof of credit worthiness. This may take the form of references (roughly 3).
• If you are a small or medium-sized business (like in the cottage industry), AVOID lines of credit. Rather, tell your customers that single orders must be fully paid before new ones can be made.
• Have a backup plan for non- or late payment.

Advance Deposits 

Advance deposits require customers to pay a percentage of the total wholesale order when they place the order. Subsequently, they will be required to pay the balance upon shipment or delivery. This is ideal for the cottage industry, especially involving slow moving and custom-made products.

DOs & DON'Ts

• Use for manufacturing custom orders, especially ones whose continued success is uncertain.

Consignment 

Consignment aka Sale or Return (SoR) requires customers to pay only for the merchandise they succeeded in selling. Customers are therefore entitled to return products they could not sell.

DOs & DON'Ts

• Do NOT use this for goods that may not be easy to sell after their return, like products that are perishable, easily damaged and so on.

Credit or debit card

Credit or debit card payment terms are also typical and have several benefits. They offer a win-win payment for the buyer (who pays on credit) and the seller (who gets paid quickly, without the risk of non-payment). Furthermore, offering credit card payments is highly desirable as it not only looks more professional but, as a consequent, may generate more and possibly larger sales.

Cash or 'cash on delivery (COD)' aka 'collect on delivery (COD)' payment terms are not very typical for wholesale purchases. Despite its name, 'cash' may be considered not only as paper cash but also credit card and debit card payments. 

MORE CONTENT RELATED TO WHOLESALE PAYMENT TERMS

• Pricing for the cotton industry
• How to introduce yourself as a high value and trustworthy B2B seller.
• Learn more about why raising prices for product decommoditization is sensible. 
• What is your brand personality and how does it translate in your payment and other policies? Like retail customers / consumers, wholesale buyers will also trust, like and commit to a brand personality they see as compatible with which to have a relationship.