Showing posts with label cost-of-credit. Show all posts
Showing posts with label cost-of-credit. Show all posts

Monday 9 September 2013

M&S extension of credit period 'in line with industry standards'...

Britain's biggest clothing retailer has allegedly sent letters to its 500 general merchandise suppliers on September 5th outlining the new terms. About 50 are in Britain.

Freight-on-board suppliers' payment terms were lengthened to 75 days from 60 days and full-service vendors, which transport, store and deliver the goods, will have their payments times extended to seven weeks from five weeks.

Incidentally, some major retailers work with banks to negotiate preferential lending rates for their suppliers, where selected suppliers are able to borrow against their sales invoices to the customer to ease their cash flow. As you know, this 'factoring' process, whereby an invoice is 'sold' to a financier for a discount on the invoice value, represents an additional cost of doing business, and should be an essential part of your personal tool-kit in these unprecedented times...

In other words, depending upon your credit-worthiness, suppose a 50-day invoice is factored to pay in one day, and the discount is 2.5% off invoice, the cost can work out as follows:

Assumptions:
Supplier's 'normal' cost of credit from a bank is 8%, and the invoice is for £250k, payable in 50 days.
Therefore the supplier is paying 2.5% i.e. £6.25k for the use of £250k for 50 days, which is equivalent to £45.6k for 365 days i.e. 18% is the annual cost of the money

Suppose a retailer moves their credit period from 35 days ( i.e.10.4 times/annum)  to 49 days (i.e. 7.4 times/annum), then the additional cost of credit works out as follows:

Say cost of credit on £250k for 365 days @8% per annum is £20k i.e. £250k x 0.08
Then the cost of credit for 35 days is   £1.9k i.e. £20k/10.4
...and the cost of credit for 49 days is  £2.7k i.e. £20k/7.4
Therefore the additional cost of moving from 35 days to 49 days is £0.8k on a £250k invoice

So the real issue is whether you negotiate with the retailer, or the bank...

Your choice, but at least an understanding of how to run the numbers puts you in a better position to negotiate, unless of course you prefer to operate in the dark.....?