As a small business owner, it’s important to have an understanding of common credit terms in Malaysia.
Credit terms are the agreement between a seller and buyer that details how much the buyer has to pay for a purchase and by when. In other words, credit terms are a contract that describes the specific requirements that your buyer must meet. When you receive an invoice, the credit term stated helps you prepare for payment.
Most businesses have credit policies set up for their customers with different payment terms, so purchases can be made on account. These policies help to boost commerce because customers can buy goods before they actually have the funds to pay for them – as long as they meet the payment terms.
Why are Credit Terms Important?
The importance of credit terms comes back to one thing: cash flow.
Credit terms state when buyers need to pay for a purchase, typically ranging between 30 to 90 days. This means that you can order inventory and have time to sell them off before having to make the payment.
Every transaction is different and customisable, which is why clear payment terms and conditions help businesses manage their payment cycle and cash flow better.
As a buyer, credit terms tell you the expected payment amount, due date and method, helping you plan the payment schedule and manage your budget.
Businesses set their own credit terms depending on the relationship with customers, their business type and financial information. Dropee Credits, for example, offers 60-day credit terms for you to purchase any product on our marketplace and as many times as you like. There are also no interest fees or hidden charges – as long as you pay on time!
Credit terms like Dropee Credits allow you to ensure that you will have cash on hand when you need it.
10 Credit Terms in Malaysia You Should Know
There are many credit terms you may receive. From different modes of payment to due dates and even discounts – it’s important to know what are your options.
Here are 10 common credit or payment terms every SME in Malaysia should know.
1. Cash
Setting your payment term as cash indicates that only cash payments are accepted and no credit is extended to your customers.
2. Cash on Delivery (COD)
With COD, your customers must pay in cash once their order has been delivered to them. This means your customers have to prepare cash on the delivery day and make the payment once they have their order on hand.
3. Cash in Advance (CIA)
A CIA payment term requires your customers to pay for their purchase in cash before their order is delivered to them.
4. Payment in Advance (PIA)
Like CIA, a PIA credit term also requires your customers to pay before goods are delivered to them. The difference is that PIA can be in cash or credit, if you choose to extend it.
5. Net 7/14/30/60/90
This is the most commonly used payment term, which indicates the number of days that payment is due after the date of invoice. For example:
- Net 7 – Payment must be made 7 days after the date of invoice
- Net 14 – Payment must be made 14 days after the date of invoice
- Net 30 – Payment must be made 30 days after the date of invoice
- Net 60 – Payment must be made 60 days after the date of invoice
- Net 90 – Payment must be made 90 days after the date of invoice
Net 30 remains the most common payment term used by large companies in Malaysia.
6. End of Month (EOM)
EOM tells your costumes that payment is due by the end of the month that the invoice is issued.
7. 2/10 Net 30/60/90 or 2%10 Net 30/60/90
Businesses use this credit term to encourage their customers to pay earlier by providing discounts as an incentive. The code abbreviate term details and indicate:
- Discount percentage if paid in cash / number of days cash discount is available
- Net amount of payment due / number of total days in the credit period
Standard term rates that businesses use include:
- 2/10 Net 30 – Customers get a 2% discount if the invoice is paid within 10 days after the date of invoice. If the discount isn’t taken, payment is due 30 days after the date of invoice.
- 5/7 Net 60 – Customers get a 5% discount if the invoice is paid within 7 days after the date of invoice. If the discount isn’t taken, payment is due 60 days after the date of invoice.
8. Line of Credit
A line of credit is offered to large businesses that make multiple purchases in the same month. Under this credit term, all the goods and services purchased within the month are billed in a single invoice that the customer receives at the end of the month.
9. Stage Payment
Stage payment is a credit term that allows payment in instalments. It breaks up large purchases and indicates how much your customer has to pay at different stages of the transaction. Some examples of stage payment terms include:
- 50:30:20 – 50% of the total invoice due before shipment, 30% due 1 month after the date of invoice and 20% due 2 months after the date of invoice.
- 40:30:30 – 40% of the total invoice due on the date of invoice, 30% due 1 month after the date of invoice and 30% due 2 months after the date of invoice.
- 30:40:30 – 30% of the total invoice due upon order confirmation, 40% due upon delivery and 30% due 1 month after delivery.
10. Contra
Contra is offered to businesses that you are also purchasing goods from. Under this credit term, your customer’s total payment due is offset by the amount that you owe them for the goods you purchased. For instance, if your customer needs to pay you RM3000 but you purchased RM1000 worth of goods from them, they only need to pay RM2000.
Using Credit to Scale Your Business
As a small business owner, understanding the different credit terms and how they can help you manage payments and expenses is crucial.
Credit terms create a system that ensures you can still buy goods and have extra cash in hand to run your business.
Credit terms greatly help SMEs with limited cash flow as it allows you to order inventory without having to pay upfront. Apply for Dropee Credits here to access credit terms at 0% interest fees for any product on our marketplace!
