Terms of Payments

These are the various agreements/conditions agreed upon between sellers and buyers regarding how debts arising from their transactions should be settled.


These conditions include;

-How payment is expected

-When payment is expected

-What is included in the quoted price e.t.c.
Terms of payments are broadly categorized into two;
a.Cash payments
b. Deferred payments(credit payments)

-This classification depends on whether the agreement is to pay for the products immediately or at a later date.

a. Cash Terms of payments

Cash terms of payment apply when a buyer is required to pay for goods or services immediately before or after delivery.

They include the following:

a) Spot cash

This is where payment is done at the point of purchase.

-Mainly used in retail businesses where customers are required to pay as they get the goods or receive the service.

b) Cash on Delivery (C.O.D)

-This is where the buyer pays for the goods (or services) as soon as they are delivered to his or her premises.

c) Cash with order (C.W.O)

-This is where the buyer is required to pay for the goods when making the order for the goods or the services.

Circumstances under which C.O.D and C.W.O are appropriate

i. When the buyer is new to the seller

ii. Where the buyer’s credit worthiness is in doubt

iii. Where the seller is operating mail order stores(C.W.O only)

iv. Where C.W.O or C.O.D is the policy of the business

v. If the cost of collecting debts is considered high by the seller

vi. When a seller is to make goods based on unique specification provided by a particular buyer(C.W.O only)

vii. Where the seller wants to avoid tying up business capital in debts.

d) Prompt cash

This is where payment should be made within a few days(normally seven days) after delivery.
-Prompt cash period allows them to examine the goods and check the invoice to certify its corrections

ii) Deferred payments

This means that goods or service are not paid for in full on delivery.

They are instead paid in future in a lump sum or in several instalments.

The period within which a buyer is supposed to pay the seller is referred to as credit period and is expressed in terms of days.

-Terms of payments in credit transactions are usually agreed upon by the seller and the buyer depending on;

  • Capital base/financial stability of the seller
  • The nature of the goods supplied
  • The relationship between the buyer and the seller
  • The credit worthiness of the buyer

    -In determining the credit worthiness of a buyer, the seller will consider;

    a) Character

    The behavior of the buyer in terms of honesty, which determines the probability of the buyer honoring his /her debt obligations

    b) Capacity

    The buyer’s ability to pay as indicated by past business performance records or the profitability and the value of his/her assets.

    c) Capital

    The financial position of the buyers business or how much the buyer’s business is worth.

    d) Collateral

    These are the properties of value pledged by the buyer as security for the credit

    e) Condition

    The effect of the existing economic conditions on the buyer’s ability to pay his/her debts.

    Forms of Deferred payments (credit payments)

    a) Open trade credit/open credit

    -Under these forms, goods and services are sold to the buyer who is expected to pay for them at a future date or within a given period

    -The buyer may also be required to pay for goods or services on installments.

    -Discounts may be allowed to encourage the buyer to pay
    on time.

    -The ownership of the goods passes to the buyer immediately after entering the contract.

    The seller should however ensure the buyer will pay by:

  • Ascertaining the credit worthiness of the buyer
  • Asking the buyer to guarantee payment by signing some documents e.g.bill of exchange
  • Asking the buyer to have someone else to guarantee the payment
  • Asking the buyer to pledge (mortgage) some of his/her property as security

    Factors to consider when giving credit

    a. Credit worthiness of the buyer

    b. Repayment period

    c. Amount of goods the customer wants

    d. Availability of adequate stock

    e. Honesty i.e. reliability of the customer

    f. Frequency at which the customer buys from the seller

    g. Seller’s intention to attract and retain customers

    NOTE: No interest is usually charged on open trade credit.

    Examples of open trade credit

    i) Simple credit(prompt cash/personal credit)

    -Is a form of credit extended to a trader or a customer for a very short time,usually not more than a week
    -It is a common form of credit between retailers and their customers.

    -It is also referred to as prompt cash because payment is made within a short time.

    ii) Monthly credit

    -A form of credit extended when a seller allows the buyer to pay/settle his/herdebt after one month
    -The buyer can continue taking goods from the seller up to the end of the month.

    -It is a form of credit usually allowed by retailers to salaried workers for goods such as food items and newspapers

    iii) Budget Accounts

    -Are usually operated by large scale retailers to approved customers

    -The retailer keeps an account of the customer in his/her books

    -To operate budget accounts;

  • A deposit is required
  • Regular payments are to be made
  • There is a maximum amount of credit to be allowed
  • The customer may be charged for any special services given by the seller called “after sale services”

    iv)Trade credit

    -This is credit given by a trader to another trader when goods are bought for selling
    -Payments for the goods is made after selling the goods or within an agreed period of time

    v) Credit card facilities

    -Plastic money (credit cards) enables the holder to obtain goods and services on credit form specific suppliers (people willing to accept the cards)

    -They also enable the holders to obtain money from specific banks and other specified financial institutions
    -They are available to adults of approved credit worthiness

    -Some credit cards can only be used locally while others like visa cards can be used both locally and internationally.

    -When a customer makes a purchase using the card, the seller electronically verifies the validity of the card and whether the credit-card holder/customer
    has sufficient credit to cover the purchase. If all is well, the credit card customer signs a specific form that have been filled by the trader.

    Such forms are usually provided by the card company to the trader.

    The trader and the card holder retain a copy each and the other copies are sent either to the credit card company or to the trader’s bank.

    There are therefore 3 parties to a credit card;

  • The company that issues the cards
  • The card holder
  • The trader
    -At regular intervals, the credit card company sends a statement of account to each card holder showing the outstanding balance at that time.

    The outstanding balance should not be greater than the allowed credit limit.

    -Examples of companies that issue credit cards include; Barclays card,American Express, Access cards and Visa cards.

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