In this article, learn about:
What payment terms are
Payment terms vs allowances
How payment terms affect your cash flow
How to negotiate payment terms
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Payment terms may seem like a minor detail in a supplier agreement, but in reality, they can contribute to the success or failure of a business’s financial health. First, they control when suppliers are paid, which affects the capacity to pay bills, make operational investments, and control expansion. In industries with tight margins, like retail and consumer packaged goods (CPGs), cash flow timing is everything.
Payment terms often intersect with compliance requirements, allowances, and operational details. One late delivery, one shortage, or even one misaligned invoice can push back payment, leaving suppliers without the cash flow they expected.
What are Payment Terms?
Payment terms are simply the rules that spell out when a buyer needs to pay a supplier and under what conditions. They set expectations on both sides and help suppliers plan for when money will actually arrive.
Most payment terms include three parts:
The payment period (net payment days): this is how many days can pass before the payment is due. For example, this can be net 30, 60, or 90 days. Payment periods may vary depending on the retailer and what was negotiated between the buyer and seller.
Discount incentives: these are optional incentives for the buyer if they pay the supplier earlier than expected.
Payment triggers: this is the event that starts the countdown for the payment. For example, once an invoice is sent, the buyer could have 30 days before payment is due, or the countdown for payment could be once the receipt of goods has been issued. May vary depending on negotiations and retailers.
In practical terms, this may look something like 2/10 Net 30. This means that a 2% discount would be available for buyers if the payment was made within 10 days; otherwise, full payment would be due in 30 days.
At the end of the day, payment terms answer a very practical question: “When will the supplier get paid?”
Related Reading: Walmart Agreements and Allowances Cheat Sheet
Common Types of Payment Terms and Acronyms in Retail & CPG
Cash on Delivery (COD)
Cash on Delivery (COD) means that payment is due once the goods arrive. This reduces suppliers’ risk but is an uncommon method of payment with most larger retailers. Smaller independent stores and wholesalers still use COD to lessen their credit exposure and associated risk.
Milestone Payments
Milestone payments are common in large, complex contracts (like long lead production). This could result in payments being tied to stages of completion, for example, 30% upfront, 30% at shipment, and 40% upon delivery.
Consignment Agreements
In a consignment agreement, the supplier keeps ownership of the goods until the retailer sells the products from stock. As soon as the retailer sells the product they pay the supplier. This option reduces the retailer's risk but ties up the supplier's money in the form of unsold inventory for a period of time.
Open Account
An open account is an arrangement where the buyer receives the products before any payment takes place. Payment would happen at a future date typically under agreed upon net terms.
Letter of Credit (LC)
A letter of credit is a financial guarantee from a bank that promises the supplier will be paid once certain conditions are met (like proof of shipment). An LC is a typical method of payment for international trade, as it protects the supplier from non-payment in higher risk markets and also gives the buyer comfort, as funds are not released until all of the terms are fulfilled.
Payment Terms vs Allowances
Payment terms often get confused with allowances, but the two are very different:
Payment terms dictate when suppliers are paid.
Allowances dictate how much suppliers are ultimately paid.
For example, a supplier may agree to Net 60 terms with Walmart but also give a 3% promotional allowance. This means that the invoice may be paid in 60 days, but only 97% of the original value is received.
Related Reading: Walmart Agreements and Allowances Cheat Sheet
How Payment Terms Affect Cash Flow
Imagine a supplier agrees to Net 90 terms with Walmart. A shipment leaves the supplier’s warehouse on January 10th but doesn’t arrive until February 16th due to freight scheduling. However, because Walmart starts the clock from receipt, not shipment, Walmart logs it February 16th. This means the Net 90 countdown begins then, not January 10th. Therefore, the supplier won’t see cash until mid-May. That's over 120 days after the shipment left the facility.
Buyers’ Perspective
For buyers, especially larger retailers, longer payment terms equal more liquidity, and leveraging these terms gives buyers more time to hold cash before making payments to their suppliers. That allows buyers holding cash from extended payment terms to focus on other priorities like payroll, store operations, or to reinvest in marketing. In general, when buyers extend supplier payment terms, they turn their supplier into a source of short-term financing.
This carries risks because some retailers who continuously extend terms (to their suppliers' detriment) might end up causing financial problems for smaller suppliers. Ultimately, when long terms force suppliers out of business, or at least functionally limit their operations, they may cause product delays or shortages.
Suppliers’ Perspective
In terms of suppliers, cash flow is essentially their lifeline. Suppliers are in a different position than retailers. Retailers are paid right away with their shoppers' purchases, whereas suppliers may have to wait weeks or even months for payment. During that wait time, suppliers still have to be able to finance production, payroll costs, logistics payables, and often the cost of purchasing material to fulfill the next orders. On the other hand, suppliers who negotiate shorter terms create a more stabilized cash flow position and have the potential for ongoing flexibility in their business operations or opportunities for growth.
Why Payment Terms Should Be Changed or Negotiated
Payment terms are not permanent; they should be updated according to changing market dynamics and organizational objectives. Some of the drivers that might prompt change and negotiation include:
Economic changes— inflation, interest rates, and global disruptions (e.g., tariff rule changes in 2025) all impact the price of capital.
Power dynamics—larger retailers may extend other small suppliers' terms, but suppliers with unique offerings or are in high demand may negotiate more favorable terms.
Strategic agreements—shifting from purely transactional relationships to one based on collaborative growth.
Competitive advantage—offering attractive terms can differentiate suppliers in crowded markets.
Strategies for Negotiating Better Payment Terms
For Buyers
Demonstrate reliability: show a track record of on-time payments and collaborative behavior.
Exchange commitments for terms: offer to buy in larger volumes or long-term contracts in exchange for longer payment terms.
For Suppliers
Provide incentives: early payment discounts (e.g. 1-2%) promote quick payment.
Leverage data: highlight your performance metrics like on-time delivery, low defect rates, and category sales.
Set clear policies: develop standard credit terms and consistently apply penalties for lateness.
Organizations cannot just treat payment terms as a finance issue — they are related to multiple functions of the organization. To achieve this, the Finance, Procurement, and Supply Chain teams need to align and set clear goals prior to negotiating terms with external partners.
A few questions for suppliers to consider when considering payment terms
- Do our current payment terms match the timing of our cash needs — like purchasing materials and paying for production and shipping — or are they creating gaps and impairing our day-to-day operations?
- Are early payment discounts or dynamic discounting programs giving us real cash flow relief, or are they cutting into our profit margins too much?
- Would working out fairer terms with strategic partners get us closer to building better long-term partnerships and prioritize our business during times of constrained supply?
A few questions for buyers to consider when considering payment terms:
- Do our current terms protect our cash flow without putting too much strain on suppliers?
- Are we missing out on savings by not using early payment discounts or dynamic discounting?
- Could adjusting our terms reduce the need for expensive financing?
- Would better terms with suppliers help improve reliability and lower long-term risks?
By considering these questions in regular reviews (quarterly, annually) organizations are able to identify payment term problems early and build better, data-informed strategies for terms negotiations.
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