This simple and easy-to-use tool allows 1P vendors to calculate the cash flow impact of changing their payment terms with Amazon. Simply fill in the fields marked with an * and click the ‘Calculate’ button.
Disclaimer: Results are estimations and based on the time range of entered Net Sales. Cash flow impact from payment terms may be subject to additional variables not reflected in this calculator. Consulterce accepts no liability for the accuracy of the displayed results or any financial losses incurred as a result of their use.
What are Amazon Vendor Payment Terms?
Payment terms, often also called settlement terms, refer to the agreed time frame between when Amazon issues a Purchase Order (PO) and when the vendor receives payment for the supplied goods.
These terms are defined in the vendor agreement in Vendor Central and can vary depending on category, account size, and past trade negotiations.
Understanding EOM and NET Settlement Terms
When negotiating payment terms, you may encounter abbreviations like EOM and NET:
- EOM (End of Month): Payment terms with EOM mean that the payment is due at the end of the month in which the invoice is issued, plus the agreed number of days. For example, “60 EOM” means the payment is due 60 days after the end of the invoice month, not from the invoice date itself. If an invoice is issued on August 1st, payment would be due 60 days after August 31st. As a result, adding an EOM term can significantly extend your payment period.
- NET: This term indicates the number of days Amazon has to settle a vendor’s invoice from the date it was issued. For example, “60 NET” means payment is due 60 days from the invoice date.
What is the Quick Pay Discount (QPD)?
The Quick Pay Discount (QPD) forms part of the payment terms agreed between 1P vendors and Amazon.
It offers vendors and option to receive payments faster in exchange for a discount on the invoice amount. For example, if your payment terms are 30 NET but you add a Quick Pay Discount, Amazon might pay you within 15 days but deduct the agreed discount (e.g., 3%) from the invoice.
While a QPD can improve your cash flow, it also reduces your gross margin. Deciding whether to accept or increase a QPD depends on the value of faster payments to improve your free cash flow.
How do Payment Terms Impact the Cash Flow of Amazon Vendors?
Payment terms have a direct impact on your cash flow, so it’s important to carefully assess their impact on your supplier business. When accepting longer payment terms like 90 or 120 days, it will become more difficult to finance your operations and pay for invoices from your own suppliers (e.g., for raw materials, freight, etc.).
Shorter payment terms or faster payouts through a Quick Pay Discount improve your cash flow but might reduce overall profitability. So it’s critical to strike the right balance and actively include payment terms into your annual vendor negotiations or when signing up to Vendor Central.
How do Payment Terms Impact Shortages?
Payment terms can directly impact shortage deductions with Amazon. That’s because shorter terms (e.g., 30 NET) and Quick Pay Discounts (QPDs) give Amazon less time to locate units lost or delayed during the inbound process and match them to outstanding invoices.
Here’s why that can cause problems:
1. Amazon deducts the QPD first: If you’ve agreed to a QPD, Amazon applies the discount and pays your invoice before confirming that all units have been received.
2. Amazon raises shortage claims later: If it turns out that units are missing, Amazon raises a shortage claim and deducts the amount from other outstanding invoices.
3. Vendors take the hit twice: Not only is the QPD deducted from your original invoice, but Amazon also short-pays other invoices, even when the shortage claim is invalid.
Example: Quick Pay Discount and Shortage Deductions
A first-party vendor has agreed 30 NET payment terms with a 3% Quick Pay Discount. They send an invoice for $20,000 on 1 January. Amazon pays the invoice on 15 January and deducts the 3% QPD ($600).
Later in February, Amazon claims a $2,000 shortage and deducts this amount from outstanding payments as a provision for receivables. As a result, the vendor receives only $17,400 instead of the full $20,000, losing $2,600 due to both the QPD and shortage deduction.
While the vendor can dispute the shortage claim, Amazon won’t release any deducted payments until the supplier provides sufficient evidence that the goods were delivered in full. That process can take several weeks, tying up working capital and impacting cash flow.
What are Typical Settlement Terms for 1P Vendors?
Standard payment terms typically range from 30 days (30 NET) to 60 days (60 NET). Recently, Amazon has started to ask vendors for 90 and up to 120 days. The higher the payment days number, the more time will pass before Amazon releases the payment for invoices.
To get Amazon to agree to a shorter invoice settlement, you can offer a QPD, also known as early payment discount. These discounts typically range between 1-3% and incentivises Amazon to pay vendor invoices early.
How to Negotiate Payment Terms with Amazon?
Amazon will negotiate payment conditions in two scenarios: 1) Whenever Amazon enrols your account to Vendor Central; and 2) during annual trade negotiations.
In both cases, Amazon will often ask for an increase in payment terms in combination with a higher Quick Pay Discount.
While the decision on whether to agree or reject these requests depends on the financial situation of your business, you should only accept higher payment terms in exchange for a cost price increase or lower trading terms.
Need Help Negotiating Your Amazon Vendor Terms?
If you’re unsure whether you should accept or change your payment terms with Amazon, get in touch. I provide industry-leading advisory services for Amazon vendors just like you.