How to work out what payment terms really cost — a buyer’s checklist
Most conversations about payment terms get stuck on one number: the headline rate. It is the wrong number to argue about, because it is rarely the number that decides whether the facility was worth it.
Here is a framework for working out what any payment-term facility actually costs you, and what it actually saves you. It applies to any provider, including us.
Start with the all-in cost, not the rate
A rate quoted per month or per annum is one input. The number you can act on is the total cost of the facility for one order, expressed in dollars. Add up:
- Interest or discount charges for the actual number of days you hold the money
- Establishment or application fees, and whether they are one-off or per drawdown
- Line fees on the facility whether or not you use it
- Unused limit fees, which some facilities charge
- Inspection or verification fees, if they are separate
- FX margin, which is often the largest hidden cost on a China order and almost never appears in a rate comparison
- Documentation, amendment and discrepancy fees — small individually, and they add up on complex orders
Then divide by the order value. That percentage is what the money cost you. Compare that number between providers, not the headline rate.
Then work out the days, honestly
Extended terms are priced on time, so the days matter as much as the rate. The trap is counting the wrong days.
The clock usually does not start when the goods land. It starts when the financier pays the factory — which, on a China building-materials order, is often 60 to 90 days before the container arrives, because production and sea freight happen first.
So a facility described as “120 days” may give you far less usable time after delivery than it sounds like. Ask the provider directly: from what event does the term start, and on what date is repayment due? Get it in writing on a sample order, not in general terms.
Now put the saving on the other side of the ledger
This is the part most buyers skip, and it is usually where the answer is.
The cost of a facility is only meaningful against what your cash does instead. For a builder or an importer, cash that is not tied up in a container in transit typically goes to one of four places:
- Another job. If deposits on a second project are what stops you taking it, the value of the facility is the margin on that project, not the interest saved.
- Payroll continuity. Being able to hold a crew through a slow month has a real value that does not show up in a rate comparison.
- Buying better. Ordering a full container instead of a part load, or ordering early enough to avoid air freight, often moves the landed cost by more than the finance cost.
- Not drawing on a more expensive facility. Compare against your actual alternative — an unsecured business loan, an overdraft, a director’s loan — not against a theoretical zero.
An illustrative example, using round numbers that are not anyone’s pricing: on a $200,000 order, a facility costing 3% all-in costs $6,000. If that $200,000 instead funds the deposits on a job with $40,000 of margin that you would otherwise have declined, the facility was not a $6,000 cost. It was a $34,000 decision.
The reverse is also true. If the cash would have sat in the account, the facility is a straight cost and you should treat it as one.
Compare against the real alternatives
| Option | What it costs | What to watch |
|---|---|---|
| Pay cash | No finance cost | Opportunity cost of the cash; concentration risk if one order goes wrong |
| Letter of credit | Bank fees plus a credit limit that ties up your facility | Protects payment against documents, not the goods |
| Unsecured business loan | Often priced as a factor rate; effective cost can be well above a headline percentage | Ask for the cost in dollars over the full term, not the factor |
| Supplier terms direct from the factory | Usually a higher unit price | Compare the unit price with and without terms — the finance is in the price |
| Trade or procurement finance | Interest plus fees | When the clock starts; what happens if the shipment is delayed |
Six questions to ask any provider before you sign
- What is the total cost in dollars on a $200,000 order held for 90 days, including every fee?
- From what event does the term start?
- What happens if the shipment is delayed — does the clock extend, and at what cost?
- Is there a fee on the unused portion of the limit?
- What is your FX margin, and is it quoted against the interbank rate?
- What are the default and late-payment charges, in dollars?
A provider that cannot answer question 1 with a number is not being difficult. They are telling you the pricing is more complicated than the brochure.
Figures in this article are illustrative and are not Linkwox pricing. All facilities are subject to assessment, credit approval and a formal agreement. Fees, charges and terms and conditions apply. Approval is not guaranteed. This article is general information only and does not take account of your circumstances; it is not financial or legal advice.
