Payment Terms: Definition, Types and Examples of Questions

In carrying out buying and selling activities, every businessman must be very familiar with the term payment terms. Businessmen who have trading companies, of course, have their own payment terms. Not only in conducting domestic transactions, but international payment terms can also be even more complicated.

These various payment terms must be followed and agreed by both parties, be it the buyer or the seller. This includes suppliers, vendors, and other parties involved in transaction activities.

Generally, before making a PO or purchase order, the seller will first be asked to show the payment terms provided by the supplier.

It contains the number of goods, the due date of delivery, the payment system to be made, etc. If both have agreed, then the product can be immediately sent through the existing distribution channels.


1 What are Payment Terms?
2 Important Role of Payment Terms
3 Types of Payment Terms

3.1 1. Installment Payment System

3.1.1 Condition n/30
3.1.2 Condition 2/10, n/30
3.1.3 EOM (End of Month) Terms
3.1.4 EOM Terms, n/10
3.1.5 EOM Terms, 2/10
3.2 2. Cash Payment System
4 Ways to Apply Payment Terms

4.1 1. Sending Sales Invoice
4.2 2. Receive Sales Invoice
4.3 3. Explaining Payment Conditions Clearly

What are Payment Terms?

So, payment terms are a mechanism or agreement made between the seller and the buyer to be able to carry out transaction activities on an item. These payment terms can relate to the cash discount, the length of time for payment, and also the amount of the discount given.

In certain cases, the terms of payment will also include conditions for compensation if the payment is made after the agreed time period has been agreed.

These payment terms are very important to apply to help the company’s financial planning from the budgeting process to paying employee salaries. For this reason, these payment terms have a very important role, and companies must be able to choose the most appropriate payment terms.

Important Role of Payment Terms

A payment transaction will be meaningless if it has not received money or is still held at the customer. Therefore, clear terms and conditions of payment are needed to help you ensure that your business will receive the money it needs.

In addition, it is also very useful to help you in facilitating everything, starting from budgeting activities, paying salaries, etc.

Without a payment schedule and terms, customers can choose to pay their invoices according to their own schedule, which will certainly bring problems to your business. One of the problems that most often occurs is cash flow problems which lead to delays in the operational activities of the business itself.

In addition, businesses that do not set clear payment terms also do not have the appropriate resources to collect late fees.

It’s important to underline that choosing and defining payment terms doesn’t mean you have to disappoint and upset your customers. This will actually offer customers additional options in paying off their debts, such as by taking advantage of discounts or lines of credit.

In some cases, this form of offering will actually be much better, and even be able to attract business from its competitors.

Type of Payment Terms

It is noted that there are two types of payment terms that generally apply in Indonesia, namely the installment payment system and cash.

1. Installment Payment System

Just as the name suggests, this method of payment will allow the buyer or customer to pay in installments for the product they have purchased. This installment payment system is then regulated in the payment terms earlier.

One example of the terms of payment in the installment method is that there are buyers who are allowed to pay in installments 12 times per year or three times per year with a previously agreed nominal amount.

In addition, this payment system is divided into several more types, namely:

  • Terms n/30

Payment terms n/30 is a provision or payment criteria with installment payments of more than 30 days. An example of this n/30 payment terms is PT ABC buying an item with a nominal value of 5 million rupiah on January 1, 2020. So, PT, ABC must be able to pay off the payment before January 31, 2020.

  • Terms 2/10, n/30

Furthermore, the payment terms 2/10, n/30 is a payment criteria with a maturity date of 30 days. However, if the buyer must be able to pay off his debt for less than 10 days, he will get a 2% discount. So, the faster it is paid off, the more economical the price can be.

A prime example of a 2/10, n/30 payment term: PT XYZ buys a product worth 5 million rupiah, the invoice date is April 1, 2020 with a 2/10, n/30 payment term. PT XYZ must be able to pay it off before April 11, 2020. So, PT XYZ will also get a discount of 2%.

  • EOM (End of Month) Terms

The End of Month requirement is a payment criteria requirement with a due date at the end of the current month. For example, PT ABC purchases a product on October 1, 2020, then the due date for payment is October 31, 2020.

  • EOM terms, n/10

Next up is the EOM Terms, n/10, which is the payment criteria with the payment deadline being 10 days after the end of the month. For example, PT XYZ buys a product for 5 million rupiah on August 15, 2019, then PT XYZ must successfully pay it off on September 10, 2019.

  • EOM terms, 2/10

For EOM terms, 2/10 can only be done by giving a discount if paid off before it is finally due. The discount is 2% after 10 days of the transaction.

2. Cash Payment System

If a company applies cash payment terms, the buyer must be willing to pay an agreed amount of funds when the goods are delivered.

After the goods have been successfully delivered and paid for, the relationship between the seller and the buyer will end. However, it will be a different story if there is a guarantee or compensation when the condition of the goods received does not match the order.

How to Apply Payment Terms

1. Sending Sales Invoice

As a businessman, you have to send several sales invoices each month. So, in order to ensure that payments can be made on time, then make sure that you have had discussions with consumers and have succeeded in agreeing on the payment terms.

2. Receive Sales Invoice

As a businessman, of course you will also get a sales invoice from the vendor. The very important thing that you must pay attention to when receiving a sales invoice is the terms of payment. Some vendors have very strict payment terms, such as cash on delivery.

However, some vendors also offer discounts for early payments. For that, make sure your business has sufficient cash reserves to make all payments.

3. Explaining Payment Conditions Clearly

Everyone must have really understood that small businesses will always have a busy schedule. Changing a sales system will certainly be very inconvenient for you, but it will make it easier for you in the future.

For that, try to create and implement a clearer system. If you manage to do both of these things well, chances are your customers will be able to pay off their debts quickly.

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