Payment Terms in Apparel Manufacturing

At some point in every new supplier relationship the conversation moves off the product and onto the money. It is often one of the less prepared-for parts of sourcing: a brand that can specify a hoodie to the millimetre will accept a payment line in a quotation without knowing what it commits them to, and a factory that measures everything will state terms without explaining why they are what they are.

This guide explains the mechanics. It does not tell you which structure to use, because that depends on the order, the relationship and what each side can carry. It also does not give legal advice: commercial documents create obligations, and what a particular clause means in a particular jurisdiction is a question for a lawyer, not a manufacturer's website.

Two questions, not one

Much of the misunderstanding in this area comes from collapsing two separate questions into a single phrase called payment terms.

The same timing can run through different mechanisms, and the same mechanism can carry different timings. Writing both down separately is a useful habit in this subject.

Incoterms are not payment terms

A quotation line reading FCA Izmir, part payment at order and the balance before shipment contains two entirely unrelated commercial concepts sitting next to each other. The delivery term settles where the seller's responsibility ends. The payment structure settles when money moves. Neither determines the other, and it is common to see a buyer assume that agreeing one has settled the other.

There is a third thing that neither of them settles. The International Chamber of Commerce is explicit that the Incoterms rules do not deal with the transfer of property, title or ownership in the goods, nor with the time, place, method or currency of payment of the price, and that the rules are not in themselves a contract of sale. Ownership is a matter for the contract and the law that governs it. Nor does a delivery term decide which party carries a regulatory role: producer status for textile end-of-life obligations is worked out from establishment and market placement, not from who paid the freight.

Naming a delivery term settles the first column and nothing in the other two. Which Incoterm suits which shipment is covered in the shipping guide; this page is only about the boundary between them.

Which delivery term to use, why FOB is written for sea freight and FCA for road and container movements, and why a named place is required, are all covered in shipping and Incoterms. The current rules are published by the International Chamber of Commerce, currently in the Incoterms® 2020 edition.

The structures that exist

The following are the arrangements a buyer will actually meet in apparel. It is not an exhaustive list, and combinations are normal: a first order and a fifth order in the same relationship are frequently structured differently.

What the risk actually looks like

It helps to stop thinking about payment terms as a question of trust and start seeing them as a question of who funds the gap. Between the moment a factory commits to materials and the moment money arrives, somebody is carrying the order. Payment timing decides who.

The earlier the payment, the more the buyer is exposed to performance. The later it is, the more the seller is exposed to non-payment. Instruments change how that exposure is carried and evidenced; none of them removes it.

Neither end of that line is unreasonable, and neither side is being difficult by preferring one. A buyer paying in advance for a first order from an unknown factory is taking a real risk and knows it. A factory shipping goods against a promise to pay in two months is financing that buyer's business and is entitled to say so plainly.

Why material commitments drive the deposit

A common misunderstanding about a deposit is that it is the supplier's margin taken early. Usually it is not. By the time production begins the factory has committed to things it cannot unwind: fabric bought or booked, yarn ordered, a dye lot scheduled, custom trims and labels produced to your brand, screens made or a logo digitised. Much of that spend has no value to anyone else, because it is specific to your product.

That is also why the deposit conversation and the sample conversation are separate. Development is its own economics, covered in what determines the cost of a sample, and sample payments and bulk payments are frequently handled as separate arrangements.

Why terms change with a track record

Payment structures are not a fixed property of a supplier. They typically reflect the exposure of the particular transaction: the order value, the material commitment, the length of the production and shipping cycle, the payment history between the two companies, and whatever credit assessment or insurance capacity sits behind the seller's decision. All of those change over time, which is why terms that were right for a first order are often revisited later.

The useful way to raise it is the one set out in the scaling guide: rather than asking once and accepting the first answer, ask what would need to be true for the terms to change. That question has an answer, and it is usually a specific one.

Open account, and the trigger problem

Open account means the goods ship and payment falls due later under an agreed credit term. It is the normal arrangement in a great deal of established trade, and it is not the same thing as paying when convenient. It is a defined due date, and defining it properly is where many disputes in this area start.

Consider a buyer asking for payment 30 days after delivery. That phrase looks precise and is not, because delivery is not one event.

• The date the goods were handed to the carrier at the factory
• The date they were loaded, or the date on the transport document
• The date they arrived at the destination port or terminal
• The date they cleared customs
• The date they were received at the buyer's warehouse
• The date somebody signed a proof of delivery

On a sea shipment those dates can be weeks apart, and on a delayed clearance they can be further apart than the credit period itself. The same ambiguity applies to the invoice: a term running from the invoice date behaves differently from one running from a delivery event, particularly if invoices are issued at shipment.

What extending credit actually costs a supplier

When a manufacturer agrees to post-shipment terms it is extending trade credit. Concretely: it has already paid for fabric, trims, labour and freight, and it now waits, carrying the receivable and the risk that it is not paid at all. For a business running several orders at once, that working-capital position is real and finite, and it is the honest reason a factory can decline terms it would otherwise be happy to give.

None of that is an accusation about a particular buyer. A supplier can think a customer is entirely good for the money and still not be able to carry three orders of it simultaneously.

Bank instruments, without the textbook

Two instruments come up in cross-border apparel trade often enough to be worth understanding properly. They are frequently spoken about as though they were the same thing with different names, and they are not.

Documentary credit, or letter of credit

A documentary credit is an undertaking given by a bank, at the buyer's request, to pay the seller against a presentation of specified documents that complies with the terms of the credit. The framework banks apply is the International Chamber of Commerce's UCP 600, with eUCP Version 2.1 as its supplement for presentation in electronic form. A second bank may in some arrangements add its own undertaking, which is a separate service with its own conditions.

The essential thing to understand is what the bank is actually looking at.

One practical principle worth carrying into any credit: every document the credit requires is another compliance obligation for the seller. Conditions that are unnecessary, or that require a document the seller cannot realistically obtain in time, create discrepancy risk without adding protection. What documents a particular credit should call for is a matter for the parties and their banks.

If a credit calls for an inspection certificate, that is a separate control that happens to be evidenced through the credit. The bank still does not inspect anything. How inspection itself works is covered in apparel quality control.

Documentary collection

A documentary collection is a different instrument that is often confused with a credit because banks appear in both. Under a collection, banks handle the shipping documents according to the collection instruction they are given. What they do not give is the independent undertaking to pay that an issuing bank gives under a documentary credit. The ICC framework here is URC 522, with eURC Version 1.1 as its electronic supplement.

Within collections, two arrangements are common enough to name. Documents against payment releases the documents to the buyer when payment is made. Documents against acceptance releases them against acceptance of a term draft, meaning the buyer takes the documents now and the obligation falls due later. The second is naturally weaker security for the seller than the first.

Credit assessment, insurance and financing

Where a supplier is asked for post-shipment terms, three things sit behind whether it can say yes. None of them is about how much the parties like each other.

• Credit assessment. An internal view, or one taken from a credit reference agency, of what exposure to this buyer is acceptable. Frequently expressed as a limit rather than a yes or no.
• Trade credit insurance. A policy under which a seller can insure receivables. Cover is granted per buyer, up to a credit limit the insurer assigns after assessing that buyer, subject to the policy's conditions. Limits are monitored during the policy period and can be reduced. It insures approved exposure within its terms, it does not guarantee every invoice, and a limit that has been withdrawn is not cover.
• Receivables financing. Arrangements under which a seller obtains funds against outstanding invoices, on terms agreed with the provider. It changes when the seller has the money; it does not make the underlying risk disappear.

What payment terms do not protect

This is worth stating plainly, because both sides get it wrong in mirror image.

A secured payment method and a well-run approval process protect against completely different failures. A cross-border order that works generally has both, plus clear documentation, and neither side relying on goodwill to cover a gap the other one is carrying.

What to settle before anyone pays anything

These answers belong in the order documentation itself, which is covered in what an apparel purchase order should contain. A payment term agreed in a message thread and never written into the order is a common way a clear agreement becomes an unclear one.