Credit Terms (made easy...)
No, these are not secret nuclear launch codes, but rather Credit Terms, also, often also referred to as Terms of Credit in the Business world.
So, what do Credit Terms Mean?
Credit Terms refer to an agreement between the buyer and seller that list the Amount and Timing of payment that a buyer will make to the seller in the future for purchases made.
In many Industries, working on Credit is common practice.
It facilitates Business since it allows purchases to be made by a buyer today with a promise to pay the seller sometime in the future.
As a practice, if used well, extending credit helps boost business since it increases the number of purchasers by allowing buyers to purchase goods today even if they don't have the money to pay for them (Think of you using your credit card).
In the Business world, seeing Credit Terms written in an Invoice with abbreviations such as 2/10 N/30 or 5/10 N/45 is common.
The abbreviation is simply Business lingo clarifying the amount and timing of payment between the buyer and the seller.
Let's clarify our understanding of this with an example.
Jamie's Light Manufacturing sells $100,000 worth of Light Bulbs to a retail shop called Box Lighthouse on Jan 1, 20xx.
Jamie's Light Manufacturing works on Credit Terms of 2/10 N/30 with Box Lighthouse.
So, what just happened here and what does 2/10 N/30 mean?
Firstly, 2/10, N/30 is referred to as 2/10 net/30.
As mentioned above, 2/10 N/30 summarizes the Amount and the Timing of payment that Box Lighthouse has to make for Jamie's Light Manufacturing.
2/10 means that if Box Lighthouse pays the $100,000 within 10 days, Jamie's Light Manufacturing will give Box Lighthouse a 2% discount.
N/30 means that if the payment doesn't happen in 10 days, Jamie's Light Manufacturing is expecting the full payment of $100,000 to be made to them within 30 days.
Pretty simple right!
Here's how you would decipher the code -
Terms of Credit Code
% discount if paid in Cash / Number of days the discount is available
The Net amount of payment due / Number of total days to make the payment.
If used well, Credit Terms have a magnification effect on the Revenue a Business makes.
But like any credit practice, it also has its disadvantages.
Not being paid back on time or the buyer defaulting are two common risks with doing Business on Credit.
It is wise to know the market norms and do your due diligence if you plan to extend credit to customers.
Though, always keep a close eye out on changing market conditions and problem buyers.
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