Mastering Payment Terms: A B2B Guide to Types, Incoterms, Risk & Negotiation 

In B2B commerce, especially global trade, setting the right payment terms is a critical balancing act. It impacts your cash flow, your customer relationships, and, most importantly, your exposure to risk. While extending credit can win deals, it can also lead to financial distress if not managed carefully. 

Negotiating terms requires skill, but a truly effective strategy starts with understanding the full landscape: the various types of terms, the crucial role of Incoterms in international trade, and the inherent risks involved. This guide covers the essentials and explains how to navigate payment terms securely and strategically. 

Payment terms define the conditions under which a seller will complete a sale. At their core, these "Terms of Sale" must clearly state: 

• Cost: The price of goods/services. 
• Volume: The quantity. 
• Delivery: When and where. 
• Payment Method: How payment will be made. 
• Payment Due Date: When payment must be received. 

Choosing these terms directly impacts your Working Capital. Offering extended terms (like Net 60) can attract customers but means your cash is tied up longer in Accounts Receivable, increasing your Credit Risk. Demanding stricter terms (like PIA) protects your cash flow but might deter buyers. 

Understanding the language is the first step. Here are some common terms (many involve extending a "Line of Credit"): 

• Net 7, 10, 30, 60, 90: Full payment is due within 7, 10, 30, 60, or 90 days of the invoice date. This is the most common form of trade credit. 
• EOM (End of Month): Payment is due by the end of the month the invoice is dated, or (e.g., Net EOM 15) within 15 days after the end of the month. 
• 1MD / 2MD: Payment is due one or two months after delivering a full month’s goods/services. 
• PIA (Payment in Advance) / CIA (Cash in Advance) / CWO (Cash With Order): You require full payment before producing or delivering goods/services. Lowest risk for the seller. 
• CBS (Cash Before Shipment): Requires payment before goods leave your facility. 
• COD (Cash on Delivery) / Due on Receipt: Payment is due immediately upon receipt by the client. 
• CND (Cash Next Delivery): Common for regular deliveries; payment for the current delivery is due before the next one ships. 
• Discount Terms (e.g., 2/10 Net 30): Offers a discount (e.g., 2%) if paid within a shorter period (10 days), otherwise, the full amount is due within the standard period (30 days). Encourages early payment. 
• Stage Payments / Installments: Payment is made in agreed-upon amounts over a specific period, often tied to project milestones. 
• Line of Credit (LOC): Allows a customer to make purchases up to a certain limit and pay over time (often involves interest). 

When trading across borders, complexity increases. Incoterms® (International Commercial Terms) published by the International Chamber of Commerce (ICC) are essential. They define the responsibilities of buyers and sellers for the delivery of goods. Crucially, they determine where costs and risks transfer, which directly influences when payment should ideally occur and where insurance (like transport or credit insurance) is most needed. 

Key Incoterms & Their Risk Implications: 

• EXW (Ex Works): Seller's responsibility ends at their premises. Buyer assumes almost all risks and costs. High risk for the buyer, low risk for the seller (but potentially uncompetitive). 
• FOB (Free On Board): Seller delivers goods on board the vessel at the named port. Risk transfers when goods are on board. Popular, but requires careful coordination. 
• CIF (Cost, Insurance, and Freight): Seller pays for costs, insurance, and freight to the destination port, but risk transfers to the buyer once goods are on board the ship in the origin country. The seller-provided insurance might be minimal; buyers often need their own. 
• DAP (Delivered at Place): Seller delivers goods to a named place, ready for unloading. Seller bears costs and risks until arrival at the destination (excluding import duties). 
• DDP (Delivered Duty Paid): Seller bears maximum responsibility, covering all costs and risks, including import duties and taxes, until delivery at the buyer's named place. Low risk for the buyer, high risk for the seller. 

Common International Payment Methods 

These methods often work alongside payment terms and Incoterms: 

• Open Account (O/A): Seller ships goods and trusts the buyer to pay by the agreed Net date. Most competitive but highest risk for the seller. This is where TCI is most valuable. 
• Documentary Collections (D/C - D/P or D/A): Banks act as intermediaries, handling documents. D/P (Documents against Payment) is safer for sellers than D/A (Documents against Acceptance). 
• Letters of Credit (L/C): A bank guarantees payment if the seller meets specific documentary requirements. Very secure but complex and costly. Often used with BGs. 

Aligning Incoterms and payment methods requires careful consideration of trust, cost, and risk appetite. 

Negotiating is about finding the sweet spot between securing a deal and protecting your finances. 

Before You Negotiate: Due Diligence is Key 

1. Know Your Cash Flow: Can you afford to offer credit? Analyze your working capital and financial reserves. Offering Net 60 might win a deal but could strain your operations if you can't cover costs. 

2. Estimate Your Client’s Creditworthiness: This is non-negotiable.  

• Review Data: Use Chamber of Commerce data, 10Ks, and trade references. 
• Assess Financial Health: Look at their operating cash flow and debt ratios. 
• Purchase Credit Reports: Use agencies to get payment history and credit scores (aim for 75+). Allianz Trade often provides this as part of its TCI service. 
• Consider Non-Financials: Company size, reputation, industry, and even product lifespan (perishables need shorter terms) matter. 

Negotiation Strategies 

1. New Clients:  

• Start Strong: Have a clear, well-drafted contract with your preferred terms. 
• Set Expectations: Define due dates clearly ("Within 30 days," not "On receipt"). 
• Offer Incentives: Use early payment discounts. 
• State Penalties: Clearly define late fees. 

2. Existing Clients:  

• Listen First: Understand why they need different terms or are paying late. 
• Be Proactive: Offer a structured payment plan if they face temporary issues. 
• Seek Compromise: If they ask for Net 60, can you meet at Net 45? 
• Recast the Contract: Formalize any changes. 

Negotiation is just the start. Post-agreement management is vital: 

• Invoice Promptly & Clearly: Send invoices immediately and confirm receipt. 
• Follow Up Proactively: Remind clients before the due date, not just after. 
• Automate Reminders: Use systems for consistent follow-ups. 
• Act Firmly on Late Payments: Maintain dialogue but enforce stated penalties if necessary. 

The Role of Trade Credit Insurance (TCI) 

Legal action and asset recovery are costly, slow, and uncertain, especially in cases of insolvency. This is where Trade Credit Insurance (TCI) becomes a powerful strategic tool. TCI: 

• Mitigates Non-Payment Risk: It protects your receivables, ensuring you get paid even if a buyer defaults or becomes insolvent. 
• Enables Competitive Terms: With TCI backstopping your risk, you can confidently offer Open Account or longer Net terms, making you more competitive. 
• Supports Credit Decisions: Insurers like Allianz Trade provide valuable credit intelligence on your buyers, strengthening your due diligence. 
• Improves Financing Options: Insured receivables are often viewed more favourably by banks. 

Choosing and managing payment terms is a core part of your business strategy. At Allianz Trade, we provide the tools and expertise – from credit intelligence to robust Trade Credit Insurance – to help you navigate these decisions effectively. We empower you to grow your business, manage risk, and foster strong, long-term customer relationships built on trust and financial security. 

Ready to offer competitive payment terms without risking your bottom line? Talk to an Allianz Trade expert today.