Buyback Allowance (Contracts) – Definition

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Buy-back Allowance (Contracts) Definition

In contractual agreements or arrangements, a buy-back refers to the term of the contract that states the amount that a seller offers for the repurchase of an item earlier sold. A buy-back allowance is the agreed sum between a vendor and a buyer at which the product is repurchased at a specified time if certain events occur.

Contracts for sales of goods or future securities can include a buy-back as a term of the contract. This means that the seller agrees to offer a sum of money (an allowance) to the buyer in a situation where he needs to repurchase the item or if the seller return the item.

A Little More on What is a Buy-Back Allowance

In future contract arrangements, buy-back allowances cater for a digression from the base when products in the contract are being delivered. Allowances are injected into future contact to ensure timely and effective delivery contracts. This may mean that there will be a discount or deviation from the basic standards for future contracts.

In future contracts, there are certain qualities that goods or products must meet and standard delivery location outlined in the agreement. However, allowances are deviations that are acceptable. The deviations can occur to the delivery time or the standards or quality of products. For example, barrels of crude oil meant to be delivered at 6850 kg/m³ density and 2% sulfur content can be delivered at 10 kg/m³ for density and 0.5% for sulfur given deviations and allowances that are permissible in the contract.

Permitted Allowances and Differentials

Allowances and deviations in future contracts are generally permissible by traders regardless the divergence of the regions. Many commodity exchanges have a list of limits of discounts and deviations that can occur in a future contract. However, these traders cannot dictate the types of allowances and differentials (deviations) that can occur. Commodity exchanges in the world have stern regulations on what amount of allowances is permissible in a given contract.

The Commodity Futures Trading Commission (CFTC) in the United States alongside other commodity exchanges regulate and define the allowances and deviations admissible in future contracts. They give clear specifications on the acceptable deviations.

Examples of Buyback Allowance

The illustration below is vital to the understanding of allowances;

3/12 net 30 describes a contractual agreement in which the buyer is mandated to pay within 30 days of the invoice date. However, if the buyer pays within 15 days of the invoice date, he will have access to a 3% discount.

2/8 EOM means that the buyer will get a 2% discount if he pays within 7 days or on the 7th day after the End of the Month (EOM) on the invoice date.

A 3/7 EOM net 30 agreement however means that the buyer has to pay within 30days of the of the invoice date but attracts a 3% discount if payment is made 7 days after the end of the month  on the invoice.

3/15 net 40 ROG (Receipt of Goods) means that payment must be made within 40 days of receiving goods but if paid within 15 days, a discount of 3% will be given.

Preferred payment method discount

Vendors for retailers often give their customers who are paying with cash discounts, this saves the retailer the fees he will pay on credit card transactions if the client does not pay in cash. Therefore, offering a discount to customers enhance paying with case and saves retailers from credit card charges. Both retailers and customers benefit from the preferred payment method discount.

Partial Payment Discount

Traders or retailers who desire to enhance a better flow of cash use the partial payment discount. In most cases, there is a desire to improve cash flow but the buyer is unable to meet the desired discount deadline, the partial payment discount can be activated. This partial payment discount will cover the payment the buyer makes.

Sliding scale

A sliding scale is a discount that a retailer offers to a customer based on the custoner;s ability to pay. Not-for profit companies use the sliding scale discount more often than the for-profit businesses and retailers.

Forward dating

Forward dating entails that a retailer dates an invoice forward to enable a buyer pay for delivered goods after some time the goods have been delivered. The customer is given an additional time to pay for delivered goods way after they have been delivered. Even when the goods arrive, the purchaser still has extra time before payment is made for goods, the forward date is contained in the invoice. For example , a customer who makes purchase of goods towards the end of November to sell them during December can have up to January before he makes payment for the goods.

Seasonal discount

Seasonal discount refers to slash in the price of goods or reductions in the price of goods given to customers who make out-of-season purchase. For instance, a customer that makes a purchase in a slack period, a period with little work or activity can get a discount. For example, purchasing products when demand for them is low can attract seasonal discount.

Seasonal discount serves as an incentive for customers, this encourages them to make purchase of specific products in off-season or when they are out-of-season.

References for Buy-Back Allowance

Academic Research on Buy-Back Allowance and Deductible

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