Is vendor dating cheaper than a line of credit?

Suppliers offer seasonal dating because they want the goods in your store early, and they price it. Sometimes the price is explicit as a discount you forgo, and sometimes it is buried in the unit cost. Either way it is a financing decision, and it can be settled with a subtraction.

Take the discount and you pay 174,600 in September instead of 180,000 in December — three months earlier. To do that you draw 174,600 on a line of credit for 90 days.

• At an illustrative 11 per cent: interest of 4,736. Discount saved 5,400. Net gain 664.
• At 12.5 per cent: interest 5,382. Net gain 18. Essentially a coin flip.
• At 14 per cent: interest 6,027. Net loss 627.

The break-even is 12.54 per cent. Below that rate, borrowing to take the discount wins. Above it, take the dating. That break-even is also the annualised cost of the dating itself: 3 divided by 97, times 365 over 90, is 12.54 per cent.

The formula, so you can run it on any offer

Annualised cost of extended terms equals the discount percentage, divided by one hundred minus the discount percentage, multiplied by 365 divided by the number of extra days the dating gives you.

Some common shapes:

• 2 per cent for 10 days, net 30 — 20 extra days. 37.2 per cent a year. Very expensive terms; take the discount almost always.
• 1 per cent for 10 days, net 30 — 18.4 per cent a year. Usually take the discount.
• 3 per cent for 30 days, dating to 120 — 90 extra days. 12.5 per cent. Genuinely close.
• 2 per cent for 30 days, dating to 150 — 120 extra days. 6.2 per cent. Cheap financing; take the dating.

The pattern: short windows are expensive because the same discount is compressed into fewer days. Long dating programmes are often the cheapest money a retailer can get.

What the arithmetic leaves out

Four things, and they can reverse the answer.

The risk the arithmetic definitely leaves out

Dating concentrates a single, very large payment on one date. A 180,000 payment due on 1 December, in a business whose December is its best month, is usually fine. The same payment due on 1 February in a business whose January was weak is how retailers get into trouble.

A line of credit repaid in instalments spreads the obligation. Dating does not. Before you choose dating, look at your cash position on the due date in your worst plausible season, not your expected one. If a 15 per cent sales miss makes the December payment impossible, the cheaper financing is the one you can pay.

Decision procedure

1. Get both prices from the supplier — the cash or discounted price and the dated price — in writing, per unit.
2. Calculate the annualised cost of the dating using the formula above.
3. Calculate the all-in cost of the line draw for the same number of days, including any draw or transaction fee.
4. Compare the two dollar figures, not the two rates.
5. Check the due date against a bad-season forecast. If the single payment does not clear with a 15 per cent sales shortfall, take the line or split the order.
6. Check what the draw leaves on the line. If it leaves less than one month of ordinary purchasing headroom, take the dating even when it is slightly more expensive.

What to ask your supplier

Ask for dating as a standing programme rather than a one-off, tied to your seasonal order volume. Ask whether a partial early payment earns a proportionate discount — many programmes allow it and few buyers use it. Ask about return rights and markdown allowances on the dated order, because extended terms on goods you cannot sell is a worse problem than either financing cost.

And ask your lender, before the season, whether they will look at a seasonal advance against the purchase order rather than a general line draw. Refuse to make this decision in July on the strength of a rate you remember. Pull the current rate on the line, get the current terms from the supplier, and do the subtraction each year — the answer moves when either one does.