Setting Payment and Shipping Terms for Your Business
When dealing in the world of physical products, you will inevitably run into payment and shipping terms negotiations. Like in most business-to-business relationships, shipping and payment terms are often negotiable. Don’t just assume all payment terms are set in stone, and never accept a deal that isn’t good for you. To get a good deal, however, you need to understand how payment terms work. Here are the most important shipping and payment terms to understand.
Early payment discounts
The first place you can negotiate is your payment terms. Some vendors will require payment before shipping a product, though many are happy to sell to you on credit expecting a payment within a reasonable time frame. This time frame is defined in the sale agreement. While you have a certain time period to pay, there is a value to businesses in getting paid early. An early payment eliminates the risk of non-payment, puts cash in the bank, and even earns a little interest in some cases. To incentivize you to pay early, a business may offer you an early payment discount.
Payment terms usually come in a format that looks like this: 2/10 Net 30
This coded message, in simple English, means the buyer gets a 2 percent discount for paying within ten days, and the full balance is due in 30 days. For some customers, a 2 percent discount is plenty of incentive to pay within ten days. For others, it is better to keep the cash on hand and wait a full 30 days to pay. With an option like this on the table, the customer has some flexibility.
FOB stands for “free on board” or “freight on board.” In the accounting world, it is a term used to determine when ownership of the goods takes place. This may not seem like a big deal, but if something happens to the cargo en route, it determines who has to pay for the damaged, lost, or destroyed goods.
FOB shipping, FOB origin, or any similar term means the ownership of the goods shifts the buyer when the shipment is loaded up and leaves the factory. FOB destination means the manufacturer owns the good until it reaches the buyer at the end of its journey. If you are the buyer, FOB destination is the best option. For a seller, FOB shipping is best.
Keep in mind that if the goods are valuable, the owner should insure the shipment for the duration of the shipping period. This may be a large expense, so take that into account when negotiating shipping terms.
Research your own shipping companies
Suppliers often have their own preferred shipper, and going with that option is often the easiest way to move the goods from point A to point B, but it is not always the fastest or the cheapest. While discussing a physical product with a manufacturer in China recently, the manufacturer calculated shipping rates from two companies, a Chinese shipper and UPS, and gave me the option to choose.
But I could also look into DHL, FedEx, and specialized shippers for large product orders. If I found someone cheaper, the manufacturer would be happy to load the goods into their truck just the same. If I can save money by doing my own research on shipping, it could be worth the effort.
Shipping and payments matter
For sellers, offering a payment discount that brings cash in the door faster could be incredibly valuable, so you may be able to convince the seller to offer a bigger discount in exchange for a faster payment, or payment up front. On the other hand, if you find yourself squeezed for operating capital, it may be worth a slightly high cost to delay payment a couple of weeks.
There is no right or wrong, it’s all about what is right and wrong for the negotiating businesses. If you can find a win-win, it’s even better!