Lessons · Lesson 4 of 6
The day the two credits stopped lining up
Follow four correct decisions to a bill nobody priced, and build the check that would have caught it in ten minutes.
Lesson 4 of 6 · 18 min
Four correct decisions
14 July. Wrenfield Menswear's group treasury changes supplier payment terms from 60 days to 90 days from the bill of lading date, across the whole supply base, as policy. Bryn Lowther writes to Sakhra to say so, in advance and in writing. He asks Sakhra to accept the amendment Northgate will issue against the live credit for PO WM-8172. The goods are already on board.
16 July. Northgate issues the amendment properly: deferred payment at 90 days rather than 60, no other change.
18 July. Yasmine Kadry prices it. Thirty extra days on USD 378,240 at Almasa's quoted 14.5% is USD 4,507.79, or USD 0.1174 a piece. She reports that figure to the board.
20 July. The board accepts. USD 4,507.79 is real money. It is not worth a fight with the second-largest customer on the book, over a term the whole supply base is moving to.
Read those four again. Every one of them is defensible.
The buyer changed a payment term openly and in advance, instead of simply paying late. The bank issued a formal amendment instead of an informal instruction. The finance manager priced the delay at the right rate on the right amount and did not guess. The board made a commercial judgment about a relationship.
And Sakhra was under no pressure it could not resist. An amendment does not bind the beneficiary until the beneficiary accepts it. Sakhra could have said no. It is also worth knowing that it could not have said yes to half: partial acceptance of an amendment is not allowed and counts as a rejection. The choice really is all of it or none of it.
Nobody made a mistake. The order still lost money.
The number nobody computed
Sakhra's back-to-back credit in favour of Chenglin falls due 150 days from the fabric bill of lading of 10 April, which is 7 September.
The export money used to arrive on 31 August, seven days before that. After the amendment it arrives on 30 September, 23 days after it.
That one fact destroys the structure. Lesson 2 listed six things Almasa needed before it would issue. The fifth was that the second credit must fall due after the export money arrives. It no longer does. What Almasa approved was a deal that paid itself off. What Almasa now holds is an unsecured 23-day advance of USD 155,232 to a customer it has already refused to lend to.
Mervat Shukri's answer on 21 July has two parts.
- Almasa will bridge the 23 days, at 16.5% rather than 14.5%, because those days are unsecured. USD 1,613.99.
- Almasa will raise the cash margin from 20% to 35% of the credit amount. That is a further USD 23,284.80, in cleared funds, within five business days.
The first is a price. The second is not. It is an availability problem. USD 23,284.80 has to exist, in July, on an order that has already shipped and whose money is now two months further away than it was on Monday.
What they did instead
Amr Tantawy went back to Chenglin. That is where he should have gone on 15 July. Chenglin's price list has a third rung on it.
| Tenor of the back-to-back | USD a metre | Credit amount, USD | Matures |
|---|---|---|---|
| At sight | 2.20 | 147,840 | on presentation |
| 150 days from bill of lading | 2.31 | 155,232 | 7 September |
| 180 days from bill of lading | 2.3450 | 157,584.00 | 7 October |
Seven October is seven days after the new money date. The structure pays itself off again, the bridge disappears, and the extra margin disappears with it.
| Item | USD |
|---|---|
| Chenglin's uplift from the 150-day price to the 180-day price | 2,352.00 |
| Almasa's amendment fee on the back-to-back | 95.00 |
| One further 30-day period of usance commission at 0.125% | 194.04 |
| Total | 2,641.04 |
What the amendment actually cost
USD 4,507.79 was quoted to the board and accepted. The true figure is USD 4,507.79 plus USD 2,641.04 — USD 7,148.83. That is 1.59 times what was in the paper, 10.6% of the order's USD 67,200 gross margin, and USD 0.1862 a piece.
And there is a sharper number inside it. The extra thirty days of the mill's money cost USD 2,352.00 on USD 155,232. That is 1.515% for thirty days, or 18.4% a year. In February the same mill sold Sakhra time at 12.8%. The same money from the same supplier, 5.6 points dearer, for one reason: it was bought after the buyer had already been told yes.
The ten-minute check
| If the master credit changes… | …re-read the second credit for |
|---|---|
| the payment tenor | its maturity date — it must still fall after the money arrives |
| the latest shipment date | the fabric's shipment and expiry dates, and whether the mill can still deliver in time to make the new date |
| the expiry or presentation period | your own presentation window, which the fabric arrival date sits behind |
| the quantity | the cloth already ordered, and who owns what is now surplus |
| a document or the goods description | whether the second credit can produce what the first now demands |
Print it. Put it beside the amendment. Answer the relevant row before anybody signs anything. Every line on it is ten minutes of work, and one of them was worth USD 2,641.04 on a single order.
Check yourselfWrenfield's amendment moved the money 30 days later and cost USD 4,507.79 in interest. Why was the real bill 1.59 times that?Show the answer
Because the interest was the only cost anyone measured on the master credit, and the amendment moved a date on a second credit as well. The back-to-back was approved on the condition that it fell due after the export money arrived. Pushing the money to 30 September left it falling due 23 days too early, which turned a secured structure into an unsecured advance. Repairing it by buying thirty more days from the mill cost USD 2,641.04. And buying those days in July rather than in February cost 18.4% a year instead of 12.8%.