What Dealer Credit Really Costs: A Margin Sensitivity Example

A higher-margin order can be the weaker order if payment takes much longer. Dealer credit ties up cash while freight, salaries and supplier obligations continue. Evaluate the funding period alongside trading margin rather than treating payment terms as a final negotiating detail.

The example below illustrates operating arithmetic, not a recommended interest rate or a prediction of financing availability. Use the business's actual cost of funds and finance-approved receivables definitions.

Calculate the cash tied up

Suppose ₹10 lakh remains outstanding for an additional 30 days. At a hypothetical annual funding cost of 12%, the incremental simple financing cost is approximately ₹9,863: ₹10,00,000 × 12% × 30/365.

That estimate excludes collection effort, default risk and disputed deductions. It is a starting point for comparing offers, not a complete measure of the account's profitability. If payment is received in instalments, calculate using the changing balance rather than assuming the full amount remains outstanding throughout.

Separate agreed credit from overdue credit

A partner on 30-day terms paying on day 30 is using agreed credit. A partner on the same terms paying on day 60 is creating an additional funding and collection problem. Keep both the contractual due date and actual receipt date in the account record.

Track the value overdue, the age of the oldest invoice and any unresolved claims. An average collection period can conceal a small number of invoices that have effectively stopped moving.

Compare three commercial choices

Build a table for advance payment with a discount, normal credit, and extended credit with different pricing or security. For each, estimate trading contribution, financing cost, expected collection work and exposure if an order is returned.

Do not assume a cash discount is automatically cheaper. Compare its rupee value with the avoided funding cost. Equally, a larger initial order may not justify a longer credit period if the retailer has not demonstrated sell-out.

Tie limits to evidence

Start with an exposure the business can afford to recover slowly. Revisit the limit after actual payment cycles, documented stock movement and resolution of early claims. Make exception authority explicit; field sales should not quietly extend terms simply to close the month.

Use a weekly review that brings sales and finance together. Record the next action for each material overdue account, its owner and the date for follow-up. Distinguish a valid commercial dispute from a promise to pay unsupported by evidence.

For related operating controls, read managing dealer credit and cash flow. A channel economics review should connect margin, inventory and collections so growth consumes an intentional amount of working capital.