These Are the Different Types of Payment Terms

A major challenge in international commodity transactions is for the buyer and the seller to agree on the payment terms. Payment terms determine how credit risk is managed and which side bears which level of risk. Typically, each counterparty in a negotiation has its own preference of which terms to use taking into account the cost and risk.

Metalshub as the leading software solution for the metals and mining industry provides customers various standard payment terms in order to facilitate the process of reaching an agreement. The selectable payment terms on Metalshub are:

1. Prepayment
2. Cash Against Copy of Documents (CACD)
3. Cash Against Conditional Release
4. Cash Against Unconditional Release
5. Cash Against Documents (CAD)/ Documents against Payment(D/P)
6. Letter of Credit(L/C)
7. Open Account

The payment term “Prepayment”, also referred to as “Cash in Advance”, means that payment is made before the goods are delivered. The amount of prepayment can be negotiated between the parties on Metalshub, e.g. 30% prepayment and balance one day after delivery.

The higher the prepayment amount, the higher the risk for the buyer because he faces the risk that the seller does not deliver the goods at the time or the quality agreed in the contract.

Cash against Copy of Documents is a payment term often used in CIF or CFR transactions. It means that the seller sends a copy of the shipping documents via email to the buyer after the cargo has been delivered. Upon receipt of the documents, the buyer has usually 5 days to pay the seller via telegraphic transfer (TT). Once the seller has received the payment in his bank account, he sends the buyer the original shipping documents.

The shipping line will not release the cargo to the buyer until he can provide the original shipping documents.

Cash against conditional release is a payment term usually used when the product is stored in a third-party warehouse. It means that the warehouse company will play the role of a neutral guarantor. The warehouse company stores the seller’s material. Before transferring any funds, the warehouse sends a “holding confirmation” to the buyer, confirming that the material exists in the warehouse.

Next, the buyer transfers the agreed amount to the seller’s bank account. Once the buyer or the buyer’s bank confirms to the warehouse company that the funds have been transferred, the warehouse releases the cargo to the buyer. With this payment term, the buyer can be sure to receive the cargo and the seller can be sure to receive the money.

Cash against Unconditional Release has the same process with Cash against Conditional Release, but the warehouse will not offer any guarantee to the buyer. In this case, the buyer has the same risk as under the prepayment payment term.

Cash against Documents via Bank is a payment term mostly used in CIF or CFR transactions. To mitigate credit and performance risk, a bank nominated by the buyer and accepted by the seller is involved as an intermediary. The seller sends the original shipping documents to the bank. The bank checks that the documents are authentic and correspond to the sales and purchase contract.

The buyer transfers the funds to the bank. Once the bank has received both the funds and the documents, it forwards the original shipping documents to the buyer and the cash to the seller.

This payment term is also known as Document against Payment (D/P). It is one of the most popular payment terms in global trading, which has a low risk for both counterparties.

A Letter of Credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to pay for the cargo, the bank will be required to cover the full or remaining amount of the purchase.

This is one of the safest payment terms for the seller but the bank will charge a fee for the service.

The payment term when payment is made after a specified number of days after the delivery date (e.g. 30 days) is referred to as “Open Account”. The buyer pays only once the goods have been delivered and the quality inspected. In this case, the seller takes the full credit risk if the buyer for whatever reason does not pay for the material.

Metalshub is a leading software provider for the metals & mining industry, unlocking supply chain value. By leveraging advanced technology and market expertise, Metalshub provides software solutions for buyers and sellers to connect, negotiate, and close transactions. With its innovative solutions, Metalshub empowers businesses to optimise supply chains, make informed decisions, and drive growth in the digital era.

Digitalise your metals procurement and sales process now. Find out how Metalshub is able to help you reach new customers and find new suppliers. Register now.