In trade, the price on the contract is not the final cost.
A veteran trader once said: "The timing of the deposit changes the cost."
Getting paid today (At Sight) versus getting paid in 90 days (Usance) is mathematically different. If you ignore the "Cost of Time" (Interest), you are trading at a loss. Today, we discuss the OPM (Other People's Money) Strategy.
1. The Cost of Time: Banker's Usance
Usance means "Credit." The buyer pays later. But as a seller, you cannot wait 90 days for cash. You need to buy the next batch of steel.
This is where "Banker's Usance" comes in. It is the gold standard of OPM.
- Shipper's Usance (Bad for Seller): You wait 90 days for the money. You bear the cash flow crunch.
- Banker's Usance (Good for Seller): The Bank pays you immediately (At Sight basis) and lends money to the Buyer. The Buyer pays interest to the Bank later.
Strategy: Always negotiate for Banker's Usance. You get cash flow; the Buyer gets credit. The Bank gets interest. Everyone wins.
2. The Math: Calculating the Margin (SOFR)
Money is not free. When offering a 90-day credit term, you must calculate the interest and add it to the price. LIBOR is dead; today we use SOFR.
💰 The Usance Price Formula:
Example: Base Price $600, Term 90 Days, Interest Rate 6% (SOFR + Spread)
- Interest Cost: $600 x 0.06 x (90 / 360) = $9.00 / ton
- Final Offer Price: $600 + $9.00 = $609.00 / ton
Warning: In a high-interest environment, a 1% rate hike destroys your net profit. Update your SOFR rates weekly.
3. Bank Risk: The "Bad Bank" Nightmare
Here is a scary reality: Banks can go bankrupt too.
If you receive an L/C from a small, unknown bank in a volatile developing country, can you trust it? If that bank collapses or lacks hard currency (Dollars), you won't get paid, even with a perfect L/C.
| Risk | Solution: Confirmed L/C |
| Country Risk | If the Buyer's country bans USD outflow, the L/C becomes useless paper. |
| The Fix | Request "Confirmation" from a top-tier global bank (e.g., Citibank, HSBC, JP Morgan). The Confirming Bank adds its guarantee. Even if the Buyer's Bank fails, Citibank pays you. |
Cost: You pay a "Confirmation Fee," but it buys you 100% sleep-at-night assurance.
Final Thoughts: Risk has a Price
"Safe money costs money."
Whether it is the interest on a Usance deal or the fee for a Confirming Bank, these are not just expenses. They are the Cost of Insurance.
A smart trader gladly pays a small fee to utilize OPM (Other People's Money) and avoid catastrophic loss.
Next: Understanding Nickel & Surcharges
👉 [STS #3] Alloy Surcharge: The Hidden Cost of Stainless⚖️ Disclaimer & Privacy Notice:
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