Payment Terms of Accounts Payable and Receivable in India

For managing cash flow in an effective manner, it is important to know about payment terms first. This leads to smooth business operations and retaining cordial relationships between buyers and suppliers. In a country like India, knowing the payment terms is vital, whether you are a small business owner or a large one.

This blog provides the necessary information regarding payment terms that are used in the accounts payable and receivables.

What are Payment Terms?

The conditions and parameters of payment for an item or service are established by the vendor for the consumer. These terms are known as payment terms. These will encompass factors such as the ability to pay in installments, the use of credit or currency, the charging of interest, and the deadline for completion.

Common Payment Terms in Accounts Payable (AP)

When you buy stuff on credit, the supplier usually gives you some time to pay up. That’s where payment terms come in. In India, different businesses use different terms depending on their relationships, industry norms, and sometimes government rules. Here are some of the big ones you’ll see:

1. Net Payment Terms (Net 30, Net 45, etc.)

This is one of the most standard terms. It’s straightforward: the number after “Net” means the number of days you have to pay after you get the invoice.

Net 30: You pay within 30 days.

Net 45: You pay within 45 days.

In India, Net 30 or Net 45 is pretty common, but for bigger deals, suppliers might give you more time. You need to stick to these dates, or your suppliers might start getting antsy (or worse, slap you with late fees).

2. 2/10 Net 30 (Early Payment Discounts)

Here’s a little bonus for paying early: 2/10 Net 30 means you get a 2% discount if you pay within 10 days. If not, you still have the full 30 days to pay, but you lose the discount. Suppliers use this to get their money faster, and if you’ve got the cash, it’s a win-win—pay early, and you save some bucks.

3. Cash on Delivery (COD)

You’ve probably seen this with online shopping, but it’s not just for Amazon orders. In India, COD is still widely used, especially in retail. Basically, you pay when you receive the goods. No delays, no credit terms—just pay up as soon as you get what you ordered.

4. Letter of Credit (LC)

This one’s for the big dogs, especially in international trade. An LC is a guarantee from a bank that says the seller will get paid once all conditions are met. This term is solid for suppliers who want to reduce their risk of not getting paid.

5. Partial Payments

For bigger projects, you might not pay everything upfront. Instead, you split it. For example, you could pay 50% upfront and 50% on delivery. This gives suppliers some breathing room while they’re working on your order without them having to wait until the job’s completely done.

6. Advance Payment

In some industries—like real estate, events, or services—you’re going to have to cough up some cash before anything happens. Suppliers want security, especially when they have to invest heavily upfront. So, they’ll ask for part of the payment before starting, and then you pay the rest after.

7. On Account

This is more common with regular suppliers. You make multiple purchases throughout the month and settle up later. It’s sort of like having a running tab, and you pay it off at the end of the month or quarter.

Common Payment Terms in Accounts Receivable (AR)

Now, let’s talk about getting paid. The faster your customers pay, the better your cash flow. In India, businesses use a variety of payment terms to make sure they get their money in time.

1. Due on Receipt

This is an instant pay term where the customer is required to pay as soon as the invoice arrives. This is a standard practice when interacting with new customers, particularly when there is a pressing need for immediate payment.

2. Net Payment Terms (Net 30, Net 60, etc.)

Just like with AP, these terms let the customer know how long they have to pay. Net 30 means they’ve got 30 days, Net 60 gives them 60 days. In India, Net 30 is pretty standard, but some bigger clients will try to push for Net 60 or even Net 90.

3. Progress Billing

If you’re working on long-term projects—think construction, engineering, or software development—progress billing is a lifesaver. You don’t wait until the project’s done to get paid; you invoice at key milestones along the way. This ensures you’ve got cash coming in while the project’s still ongoing.

4. Installment Payments

Installations typically handle the purchase of vehicles, costly machinery, or real estate due to their high values. This method simplifies the purchasing process for the customer, while also providing a guarantee to the seller.

5. Credit Limits

With trusted clients, you can offer them a credit limit. This lets them buy up to a certain amount on credit and pay it off over time, usually 30 or 60 days. It’s great for fostering loyalty but can be risky if they start pushing their limits.

6. Retention Payments

Retention payments are especially used in construction industries. Until the project is fully completed with the prescribed standards, a small amount of percentage (say 5-10%) is retained. This provides the leverage on the clients’ side so that everything is done correctly according to the requirements.

7. Cash Discounts

It is advisable to provide cash discounts for early payments to expedite the process. For instance, offer a 2% discount to the buyer who settles a Net 30 invoice within 10 days. It is a little price to pay to collect your money in the bank without waiting much.

Questions to Understand your ability

Que.1 What does “Net 30” mean in payment terms?

A) You’ve got 30 hours to pay up

B) Pay the full amount within 30 days

C) You can split the bill into 30 payments

D) Pay up 30 days after delivery

Que.2 In “2/10 Net 30,” what’s the deal if you pay within 10 days?

A) You score a 10% discount

B) You snag a 2% discount

C) You pay just 10% of the bill

D) You get to push the payment another 30 days

Que.3 What’s true about Cash on Delivery (COD)?

A) Pay before they even ship the goods

B) Pay when you get the goods in your hands

C) Pay in chunks after delivery

D) Delay payment for 30 days after delivery

Que.4 What’s the point of Retention Payments in construction?

A) The client holds back 5-10% until everything’s finished and done right

B) Let’s you pay in small chunks over time

C) It’s a reward for paying early

D) Delays payment until the project hits halfway

Que.5 Why do businesses even offer cash discounts?

A) To slap a fee for late payments

B) Obtaining early payments ensures a consistent cash flow.

C) To cut the total bill permanently

D) To boost credit limits for trusted clients

Conclusion

Managing payment terms for accounts payable and receivable is key to keeping your business afloat. Get it wrong, and you’ll be stuck in a cash flow nightmare. Get it right, and you’ll keep things running smoothly while maximizing your financial flexibility. Whether you’re paying or getting paid, understand the terms, negotiate where you can, and always keep an eye on your cash flow. The Indian market can be tough, but with the right approach to AP and AR, you’ll be able to navigate it like a pro.