Procurement Glossary
Terms of payment: Definition, meaning and control in Procurement
November 19, 2025
Payment terms are contractual agreements between buyer and supplier that specify when and how invoices must be paid. They have a significant influence on liquidity, cash flow optimization and supplier relationships in the procurement process. Find out below what payment terms include, which methods exist for optimization and how current trends affect payment processing.
Key Facts
- Define payment terms Payment terms, discount options and payment modalities between Procurement and suppliers
- Optimized payment terms can improve liquidity by 15-25% and reduce financing costs
- Standard payment targets vary depending on the industry between 14 and 90 days after invoicing
- Dynamic discounting and supply chain finance enable flexible, win-win payment models
- Automated payment processes reduce processing times by up to 70% and minimize error rates
Contents
Definition: Terms of payment
Payment terms include all contractual regulations for the processing of payment obligations between the purchasing organization and suppliers.
Core elements of payment terms
The main components of modern payment agreements are divided into several categories:
- Payment term: Period between invoicing and due payment (e.g. 30 days net)
- Cash discount regulations: Discounts for early payment (e.g. 2% for payment within 10 days)
- Payment method: bank transfer, direct debit, credit card or alternative means of payment
- Currency and exchange rate regulations: Particularly relevant for international suppliers
Terms of payment vs. terms of delivery
While delivery terms regulate the physical processing, payment terms focus exclusively on financial aspects. However, both areas are closely linked and influence the overall costs of procurement.
Importance of payment terms in Procurement
Strategically optimized payment terms act as a lever for spend optimization and supplier development. They enable purchasing organizations to realize liquidity advantages and at the same time support suppliers with predictable payment flows.
Methods and procedures
The systematic design and optimization of payment terms requires structured approaches and proven methods.
Payment terms benchmarking
Regular market analyses enable the evaluation of existing payment agreements in an industry comparison. Payment terms, discount rates and payment modalities are systematically recorded and evaluated:
- Determine industry-specific payment target standards
- Evaluate cash discount potentials by comparing liquidity costs
- Analyze payment method preferences of different supplier segments
Dynamic Discounting Implementation
Flexible discount systems enable suppliers to offer variable discounts in exchange for early payment. They are implemented via supplier portals or specialized fintech solutions.
Automated payment approval workflows
Digital invoice approval workflows significantly accelerate payment processing. Integration with three-way match processes ensures compliance and control.
Tacto Intelligence
Combines deep procurement knowledge with the most powerful AI agents for strong Procurement.
Key figures for managing payment terms
Systematic measurement and monitoring of payment performance enables continuous optimization of the payment strategy.
Days Payable Outstanding (DPO)
This key figure measures the average number of days between receipt of invoice and actual payment. An optimal DPO value balances liquidity benefits with supplier satisfaction:
- Industry benchmark: 30-45 days for most B2B sectors
- Calculation: (liabilities × 365) ÷ annual purchase volume
- Target value: Maximization in consideration of supplier relationships
Cash discount utilization rate
The proportion of cash discount options utilized shows the efficiency of payment processing. High utilization rates indicate optimized processes and realized cost savings.
Payment Compliance Rate
Measures the proportion of payments processed on time and identifies process weaknesses. Target value is at least 95% for strategic suppliers. Integration with invoice automation systems sustainably improves this key figure.
Risks, dependencies and countermeasures
Unbalanced or inflexible payment terms can cause considerable operational and financial risks.
Liquidity and cash flow risks
Payment terms that are too short are a burden on corporate financing, while excessively long payment terms can jeopardize supplier relationships. Systematic cash flow management through staggered payment terms for different supplier categories minimizes these risks.
Compliance and regulatory dependencies
National and international payment guidelines (e.g. EU Late Payment Directive) define minimum standards for B2B payments. Violations can lead to interest payments and legal consequences:
- Observe legal payment deadlines in different countries
- Implement automatic interest on arrears calculation
- Fulfill documentation obligations for payment delays
Supplier dependencies and relationship risks
One-sided payment terms can destabilize critical suppliers or lead to them leaving the company. Regular supplier evaluations and fair payment terms secure long-term partnerships. Supplier enablement programs support smaller suppliers with liquidity planning.
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Practical example
A medium-sized mechanical engineering company optimized its payment terms by introducing a staggered system: A-suppliers receive 45 days payment terms with a 2% discount for 10 days, B-suppliers 30 days with a 1.5% discount, C-suppliers 21 days as standard. In addition, a dynamic discounting program was implemented for strategic partners. The result: 18% improvement in liquidity, 12% reduction in procurement costs through the use of discounts and strengthened supplier relationships thanks to fair, transparent conditions.
- Supplier segmentation according to strategic importance
- Automated cash discount calculation and approval
- Quarterly review and adjustment of conditions
Trends & developments around payment terms
Digitalization and new financing models are fundamentally changing traditional payment structures in the B2B sector.
AI-supported payment optimization
Artificial intelligence analyzes payment behavior, supplier risks and liquidity patterns in order to develop optimal payment strategies. Machine learning algorithms forecast discount potentials and automatically identify opportunities to negotiate payment terms.
Supply Chain Finance Integration
Modern SCF programs enable purchasing organizations to extend payment terms while suppliers still receive liquidity at an early stage. This win-win constellation strengthens supplier relationships in the long term:
- Reverse factoring for strategic suppliers
- Approved Payables Finance for a broader supplier base
- Dynamic discounting as a flexible alternative
Blockchain-based smart contracts
Automated payment initiation through smart contracts reduces administrative effort and eliminates payment delays. The technology enables transparent, unchangeable payment agreements with automatic execution when defined conditions are met.
Conclusion
Payment terms are a strategic instrument for optimizing liquidity, costs and supplier relationships in Procurement. Modern approaches such as dynamic discounting and AI-supported payment optimization open up new potential for win-win situations. Systematic measurement using KPIs such as DPO and discount utilization rate enables continuous improvements. Successful companies balance liquidity advantages with fair, partnership-based payment terms for sustainable supplier relationships.
FAQ
What are the most important components of payment terms?
Payment terms include payment terms (e.g. 30 days net), discount rules (e.g. 2% for 10 days), payment method (bank transfer, direct debit), currency and any securities. These elements fully define when and how invoices are to be paid.
How do you calculate the optimum discount rate?
The discount rate should exceed the company's capital costs but be below the supplier's financing costs. With a 30-day payment term and a 10-day discount period, a 2% discount corresponds to an annual interest rate of around 36%. Compare this with your financing costs to assess the benefits.
What legal aspects need to be considered when it comes to payment terms?
The EU Late Payment Directive limits payment periods to a maximum of 60 days (30 days for public clients). Default interest is automatically charged in the event of late payment. National laws may stipulate stricter regulations. Provisions under general terms and conditions law must be taken into account when formulating payment terms.
How do digital payment processes affect payment terms?
Automated invoice processing and digital approval workflows significantly shorten processing times and enable more frequent use of discounts. E-invoicing and integrated ERP systems reduce error rates and speed up payment processing. This creates scope for more advantageous payment terms with suppliers.
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