CHAPTER 6

TERMS AND DATINGS

As has been aptly pointed out.in books on economics and finance, a credit
transaction is one in which goods, services or other values are exchanged with
promises to pay for them in the future. The time element, which involves the
determination as to when payment shall be made, is generally governed by the
terms of sale, commonly referred to and indicated on bills or invoices as “terms”.
The terms measure or specify the credit period.

In the course of business operations and development, the adjectival term “dating”
came into wide and popular use to express a modification of the usual terms, by
which the time of payment is extended on account of certain circumstances or
contingencies. Obviously, dating becomes part and parcel of the terms of the credit
period.

Usage as well as custom over a long span of years have contributed to the
establishment in the various trades, sets of terms peculiar to each. These terms
are referred to as “regular”. In discussing an account or in giving references, it
has become axiomatic to.say that “the accounts being sold on regular terms.”

Lack of Uniformity in Terms

As a matter of business practice, however, one is constrained to note very little

uniformity in the use of terms. While in some trades, the cooperation of some
groups of grantors of credit has made it possible to establish and accordingly
enforce uniform terms, nevertheless, in.order trades where such cooperation is
non-existent, terms are frequently modified, not to say at times, even disregarded.

As a general observation, terms vary in different trades: In fact, at times, even

within the same trade, business houses ‘sometimes differ in the terms granted.
Furthermore, it is possible that the same seller may differ in the terms granted to
customers, and sometimes in the terms granted to the same customer. This is
frequently practiced as borne by a desire to gain a competitive advantage;
sometimes & on business do who buyers same the from pressure of result the is
this though, large scale basis.

Experience, however, has shown time and again that advantages so obtained are
of short duration. This may be explained by the fact that variation in terms, by
and large, is at best only an artificial competitive weapon, and thus, any advantage
only results ordinarily It delusion. a be to proves usually have, to seems it which in
the buyer’s playing one seller against another, and in creating an unwholesome
situation in the trade.
It need not be strongly stressed that fair terms, adhered to generally in the trade
make for wholesome practices and, in the long run, benefit the buyer as well as
the seller.

FACTORS IN FIXING TERMS

Generally speaking, there are several factors that come into consideration in the
fixing of terms. Among such factors are the following: the nature and use of the
commodity; the location; the circumstances of the customer; the purpose behind
the purchase; the credit standing of the buyer; and the regulations enumerated in
codes
of fair practices.

The Commodity as a Factor

The nature of the commodity generally circumscribe the terms of sales. Perishable
products, like fish, vegetables and poultry are generally sold on the cash basis, or
close to cash terms. In the case of the'latter, they are subject to very short terms.

It axiomatic necessities basic of category the to belonging products that to

compared universal, almost is them for demand the because saleable highly are
generally is former The markets. limited has which items non-essential and luxuries
sales spark to oftentimes, terms, credit on latter the while basis cash the in on sold
of huxuries and similar others, discounts are at times offered as well as credit terms.
which basis installment on sold often are appliances household piano, Furthermore,
cover long periods of payment.

Construction materials are generally obtained by well-known manufacturing firms

engaged in housing projects and/or in the construction of buildings on deferred
payment. This is quite understandable since they do not only extend large volume
of business to suppliers of construction materials but moreover on a year-long
basis.

Transactions that largely involve labor which is paid on cash by the seller are
usually kept on cash or very short terms. Charges for the performance of labor
on the material of the customer may vary from net cash to net 60 days.

Some heavy agricultural equipment such as harvesters, threshers, are sold on the
installment basis, the seller receiving cash through the finance company and the
purchaser enjoying ample time with which to pay. So are bulldozers and road
graders and other heavy equipment.
Geographic Considerations

In a number of instances, the seller recognizes the distant location of the buyer,
and accordingly make a concession in the matter of terms. This may be
represented by an extra 30 days time in which to pay the bill, or by allowing
a longer period for the taking of the discount. Thus, where the discount would
ordinarily be deductible only if the bill is paid 15 days from its date, the seller
may allow the buyer cash discount upon making payment 15 days after receipt of
the goods. In such cases, the terms are sometimes expressed as “15 days,
R:O.G,” that is, 15 days from receipt of goods.

Seasonal Dating

The “regular terms” of trade usually apply to shipments of orders received for
delivery-at once. Like, for instance, pulp and paper for use in printing or
newspaper publications. However, in many lines of a seasonal nature, it is
necessary to place so- called “advance” orders, thatis, orders for later delivery, to
coincide with the market demand for such goods like raincoats and umbrellas. Or
school bags to use during the opening of school. And, of course, school uniforms
for boys and girls.

Such orders give the manufacturer or importer time to get the merchandise ready
thus to enable him better to plan and to operate more economically. He may
receive the orders in advance, which are to be shipped at a certain date.

Some book stores in the Visayas place their orders for the needed textbooks with
publishers as early as the advent of the summer months which enable them to
meet and fill in the demand for such books during the opening of the school in
August.

Terms in Retail Trade

Most retailers, if not all, grant credit to their buyers who continue to extend their
patronage through the years. The terms of retail credit may vary from one retailer
to another. As a common practice, though, such buyers are required to make
monthly payments to cover part of their outstanding obligations.

In the provinces, good customers make it.a point to tender partial payments from
time to time in accordance with agreements between sellers and buyers.

Standing of the customer

lt need nat be stressed herein that there exists.a correlation between the grant of
credit and the time of payment. Until such time as payment is made, credit risk is
ever present. For this reason, some conservative businessmen refuse to sell goods
on credit to these customers with doubtful character — and, certainly, with
unknown capacity to pay. In some cases, the seller may opt to sell to him a
very limited quantity of goods on credit terms. Sometimes, the credit period may be
reduced, that is from 45 days to 15 days or so.

Cash Terms

Where it is intended not to extend credit under any terms whatsoever, it should be
made clear that goods shall be delivered to the buyer only when the seller
obtains receipt of funds corresponding to value of goods ordered. This practice is
in accord with “Cash before Delivery”. Or the abbreviated term, C.B.D. This applies
specifically to transactions in which the seller receives the cash payment as a
condition to delivery of goods, an ironclad protection to the seller’s interest.

The most common practice in business transactions is known popularly under the
abbreviated term C.O.D, which stands for its equivalent, “Cash on Delivery”. For
their protection, not a few businessmen insist that cash payments be tendered by
buyers or by a corresponding certified check issued by the buyer. Where buyers
and sellers have established long years of satisfactory relationship, this practice is
done away. Some businessmen are more than willing to transport their goods to
their valuable customers even in the absence of a promise to pay.

OTHER TERMS

At this point, let us take note of other terms governing trade transactions.
Doubtless, while they are known through their abbreviations which are commonly
used in trade, nevertheless, it is correct to say that their essential feature or
features will help contribute differentiating them from one another. Briefly, they are:

End of Month

Frequency of purchase or other circumstances may make it necessary for certain

special treatment of individual cases. One such special arrangement is the “E.0.M.”
or “End of Month”.

This arrangement springs from the need of the active buyer for convenience in
making payments, and from the desire of sellers to encourage the concentration of
business. E.O.M. makes it necessary for the buyers to issue checks to the seller
throughout the month in order to earn discounts. It also helps facilitate the seller's
bookkeeping. In many lines, this arrangement is no longer confined to the active
iccounts, but is allowed, generally speaking.

Under this arrangement, it is understood that all shipments made dunng a particular month
are to be considered as though they were made on the last day of the month, and the terms
run from the last day.
For example, shipments made on any day during September are treated as dated as
September 30. When the terms are, for instance, 2 per cent, 10 days, the change to 2 per
cent, 10 days, E.O.M. means that the September bills are payable on the tenth of October,
instead of being payable on 10 days from their various dates in September.

A modification of the E.O.M. arrangement is sometimes adopted. This provides for two
payments a month. Under the plan, all bills dated from first to the fifteenth of the month are
considered as dated from.the sixteenth to the end of the month and are considered as dated
the last day of the month.

Other departures from the regular terms occur in order to meet competitive conditions or the
special exigencies of the buyer. Thus in a buyer’s market, the sharp buyer for no good
reason at all, may ask for the extra dating. Likewise, the seller may yield to the import
opportunities of buyers who plead special circumstances such as the opening of a new
store, the putting up of a new building. Special dates, the limitation upon purchases for a
period are among the reasons commonly adduced or given.

The assumption is that the buyer must keep his financial affairs in good order, and this angle
is usually considered in connection with the request for extra dating. The consent through
could mean the aggravation of a risk although at times there may exist some justifications in
exceptional cases where the set-up is essentially sound.

Many factors are at work to justify the shortening of terms. The business turnover has been
considerably quickened. This is due to more rapid facilities for distribution, and the tendency
to buy in smaller quantities and carry less stock.

In some lines, too, the intervention of finance companies in installment transactions enables
manufacturers to realize cash on their shipments at the time of their delivery.

Discounts

An integral part of the terms is the discount. Apart from determining the maturity of the bills,
the terms may also provide insights into the periods prior to maturity when cash discounts
may be taken. In fact, as observed, there appears considerable misunderstanding in respect
to the subject of discounts.

Succinctly stated, the cash discount refers to the amount allowed for payment prior to the
maturity of the bill. Such payment reduces the credit risk of the seller, and enables him to
have earlier possession of funds. For this, he allows a discount, which is usually in excess of
the rate of bank interest.

Where the terms are | per cent 10 days, net 60 days, it means that the purchaser must wait
for days from the date of the bill and then pay the full amount Should he pay the bill 10 days
after its date, he may deduct 1 percent. In other words, the seller would be receiving
payment 50 days before maturity and he allows i percent on the bill which is at the rate of
about 7 1/2 per cent per annum.
CASH AND TRADE DISCOUNTS

A cash discount, strictly speaking, is the price paid for the earlier payment of funds. It arises
where the terms allow the buyer to pay on a certain date, net, or Prior thereto, less a
discount. The discount is the bonus offered to induce the earlier Payment of the bill.

A trade discount, on the other hand, is intended as an allowance from the, price. When
published price lists are issued, the discounts render the price greater flexibility in relation to
varying quantities purchased to changing market conditions, Furthermore, the discount may
be an allowance offered at the end of a given period for purchases in excess of its stipulated
amounts..As a marketing strategy, it is intended for the development of strong business ties
between the seller and buyer, It helps build long and lasting relationships between them.

Trade discount is distinctly an element of price.