Choosing, and what each answer leaves uncovered

Three questions, in this order

You will rarely choose a payment term freely. You will be offered one, usually late, usually as a line on a purchase order somebody else drafted. What you can do is decide quickly whether it is acceptable, and if it is not, say what would be, with a number.

Three questions do that, and the order matters.

One: whose willingness am I depending on? This is the band question from lesson 3. It comes first because it is the only one that cannot be fixed with money. A move from band 4 to band 2 changes what you are carrying. A move within a band changes your cash and nothing else.

Two: what does the gap cost? Dated payments out, days, your own rate. Lesson 2. This is arithmetic and it takes twenty minutes.

Three: what am I holding if it goes wrong, and what is that worth? Not what you would have lost, but what you would actually be holding, valued at what somebody else would pay for it. Lesson 3 valued 18,400 branded chore jackets on a quay at Antwerp at clearance price, which is the honest number and not the comfortable one.

Answer those three and the fourth follows on its own: turn the answer into an FOB and put it in front of the buyer as a price, not as a preference.

The test for any offer of cash against price

Buyers, and sometimes your own finance department, will offer you cash sooner in exchange for a smaller number. Early settlement discounts, prompt payment rebates, a price break for a shorter term. They all have the same shape, and one test settles all of them.

Turn the offer into an annual rate and compare it with what your own money costs.

The arithmetic is one line. A discount of d for n days earlier is an annual rate of d divided by (1 minus d), times 365, divided by n.

Take the repeat order from lesson 5: TR-4870, 18,400 jackets at USD 21.60, worth USD 397,440.00, on open account at 75 days. It is March 2027, and Nabaruh's cash is tight because next season's fabric deposit falls due in the same fortnight. The finance manager offers Thurlemont 2.5% off for settlement 41 days early, and it is accepted the same afternoon.

• The discount costs USD 9,936.00
• Forty-one days of funding on USD 397,440.00 at 13.5% is USD 6,026.93
• Nabaruh is USD 3,909.07 worse off, and USD 9,936.00 is 30.0% of that order's entire margin

Now the annual rate, which is the number that should have stopped it in the meeting. 2.5% divided by 97.5%, times 365, divided by 41, is 22.83% a year. Nabaruh has just borrowed at 22.83% from a customer, while holding a bank facility at 13.5% it had not fully drawn.

Turn it round and you get a rule of thumb worth carrying into every one of these conversations. At a facility rate of 13.5%, a 2.5% discount only pays if it brings the money forward by 69.3 days or more. Forty-one days is not close.

What each answer still leaves uncovered

This is the part that gets left out of every summary table, including the good ones. A table has a column for what an instrument does and no column for what it does not do. Here is the missing column.

Read the last row again with the figures from lesson 4 in mind. Meerlan pays 90% of the invoice, so the uninsured first loss on TH-4470 is USD 40,020.00 and the order's margin is USD 35,880.00. A single default costs more than the order ever earned, and the policy was in force and paid out correctly. Insurance turned a catastrophe into a loss. It did not turn it into a profit, and nothing sold as protection ever does.

The row above it is the one that catches good factories. A credit protects you from your buyer, not from yourself. Nabaruh's discrepancy rate of 0.375 means that on three orders in eight, the instrument bought to take the buyer's willingness out of the equation puts it straight back in. A set of documents that does not comply is paid only if the buyer agrees to waive the point. Course 13.2 is that whole problem, and it is the single highest-value course in this track for a factory already shipping under credits.

Act as an export documentation and trade finance specialist. Below is the payment clause from a purchase order, together with anything the order refers to. Read it back to me as three things: risk, cash and cost. Here is the clause and any attachment it points to: [PASTE EVERYTHING — THE PAYMENT LINE, THE SUPPLIER MANUAL CLAUSE, THE GENERAL CONDITIONS, THE CREDIT IF ONE HAS BEEN ADVISED]. My facts: buyer [BUYER], order value [AMOUNT], on board [DATE], my facility rate [RATE] a year, my country [COUNTRY], the buyer's country [COUNTRY], the issuing or collecting bank if named [BANK AND COUNTRY]. Do the following. First, name the instrument precisely — advance, documentary credit sight or usance, confirmed or not, documents against payment, documents against acceptance, open account — and say which band it falls in: whose willingness stands between me and my money. Second, find the TRIGGER that starts the clock, and quote the exact words that set it. Distinguish the bill of lading date from the invoice date, the invoice receipt date, arrival, customs release, goods receipt and any mention of a payment run. If the clause and the attachment disagree, say so plainly and tell me which document the order says wins. Third, work out the realistic number of days from on board until the money arrives, showing the transit, clearance and internal steps you assumed, and price it at my facility rate. Fourth, list every condition in the clause that is outside my control — a document somebody else issues, an inspection certificate, a nominated carrier, an approval — and say what happens to my payment if each one is late. Fifth, list what I am holding if I am not paid, and what it is worth to somebody who is not this buyer. Sixth, give me the three questions to send back in writing this week, worded so they can be answered yes or no. Do not soften anything. If the clause is bad, say it is bad and say which sentence makes it bad.

Where the rest of the track goes

You now have the map. The rest of track 13 fills it in.

• 13.2, Letters of Credit in Practice — the terms that will get your documents refused, the check, the discrepancy, the cure.
• 13.3 — financing the materials when the buyer's credit is the only asset you have: back-to-back and transferable credits.
• 13.4 — the cash cycle at factory level rather than order level, where the peak in lesson 2 becomes a limit on how much business you can accept.
• 13.5 — selling or insuring what you are owed instead of carrying it.
• 13.6 — the currency the payment is in, which is a second price sitting under the first.
• 13.7 — guarantees, bonds and standby credits, including the advance payment guarantee from lesson 5.

And outside this track: 12.1 for the document set as a customs and carriage matter, 8.3 for Incoterms and where the payment clock actually starts, and 8.5 for what the whole thing lands at on the buyer's side.

What you should be able to do now

1. Run the three questions in order on any payment line you are handed, in about half an hour.
2. Turn every cash-for-price offer into an annual rate before you answer it, and compare it with your own facility rate.
3. Write the uncovered column yourself for whichever instrument you use most, and check that the biggest number in it is smaller than your margin.
4. Say the number out loud in the pre-costing meeting. By the time the purchase order is signed, the payment line has already been priced. The only question is whether you priced it, or paid for it out of the margin.