What a 90-day payment term actually costs: the working-capital math

A buyer asks for 90 days. You agree, because the order is good and the relationship is worth more than a fight over terms. Nobody in that conversation says what the 90 days is actually worth. It is worth something, whether you notice it or not.

The mechanic: you are financing your buyer, interest-free#

Every day between the goods leaving and the money arriving, your buyer is holding money that is yours. Advance payment, a letter of credit, DP, DA and open account are all one spectrum, and what moves along it is not risk alone, it is how long you are willing to lend your own buyer money for free.

You already paid for the raw material, the labour, the packing and the freight before the goods left. If the buyer pays on shipment, that money comes back straight away. If the buyer pays in 90 days, you are carrying that cost for 90 days, either as cash you do not have for the next order, or as a loan you take to cover the gap. Either way it has a cost. Calling it "credit terms" instead of "financing" does not make it free.

The formula#

The cost of a payment term is:

Order value × number of days × your daily cost of capital

Your daily cost of capital is your annual borrowing rate, whatever your bank actually charges you or you could earn on that money elsewhere, divided by 365.

Every part of that formula is something only you know: your order value, the term you are agreeing to, and what money costs your business. Nobody outside your own bank statement can compute it for you. What follows is the mechanic, not your number.

An example, entirely illustrative#

Say an order is worth ₹10,00,000 and the buyer wants 90 days instead of payment on shipment. Say your working capital costs you 10% a year, an illustrative rate, not a quote for anyone's actual borrowing cost, and yours may be higher or lower.

• Daily cost of capital: 10% ÷ 365 ≈ 0.0274% a day
• Cost of the 90 days: ₹10,00,000 × 90 × 0.0274% ≈ ₹24,660

That is roughly 2.5% of the order value, gone before you have shipped a second container, and gone whether or not you noticed it leave.

The same order at 60 days costs about ₹16,440. At 30 days, about ₹8,220. The gap between 90 and 60 days is worth roughly ₹8,220 on this order alone, exactly the cost of the extra 30 days, and it is a real number to hold in a negotiation.

What you can actually borrow against the gap#

You do not have to wait out the 90 days on your own cash. Once you have shipped, Indian banks lend against the export bill itself, post-shipment credit, sometimes called discounting the bill, so you can get most of what you are owed now, and the bank recovers it once realisation happens.

What it costs you is the part worth being precise about. Indian banks are free to set their own rate for this. RBI's rules on export credit leave rupee post-shipment credit priced against each bank's own lending benchmark, and foreign-currency export credit has been priced entirely at each bank's discretion since 2012 — RBI does not publish a single centrally-fixed rate for either. So there is no one figure to state here as "the" rate: it depends on your bank, your relationship with them, and the quality of your bill. Ask your bank for their post-shipment rate before you price a long term into a quote — if the answer is, say, 9% a year, use that 9% in the formula above instead of the illustrative 10%.

Why this cost never shows up on an invoice#

Nothing in your paperwork bills the buyer for it. There is no line item for "cost of the 90 days you asked for." It does not appear on the shipping bill, the commercial invoice or the letter of credit. It shows up nowhere except as a smaller number when you work out your real margin after the money lands — the same gap the freight and FX lines already quietly take from a quote. Nobody stole it. It was never billed, so it is simply missing.

Price it in, or use it to negotiate#

Once the formula gives you a number, it stops being a feeling and becomes a line in your pricing, exactly like freight or FX. Two ways to use it:

Add it to the quote. If 90 days costs you 2.5% of the order, that 2.5% belongs in your price the same way freight does. A buyer who agrees the term is agreeing to carry that cost somewhere in the price, whether it is named or not.

Trade it for a shorter term. The ₹8,220 gap between 90 and 60 days on a ₹10 lakh order is a real number you can put in front of a buyer: a small price reduction in exchange for getting paid a month earlier can cost you less than financing the extra 30 days would.

Either way, the number exists before the negotiation starts. Working it out first is what turns a payment term from something you concede into something you price.