Most traders obsess over the product price. "Can you discount $5?"
But they ignore the most expensive part of the deal: The Cost of Money.
In international steel trading, choosing between T/T (Telegraphic Transfer) and L/C (Letter of Credit) is not just a banking choice. It is a strategic weapon.
Today, we reveal the hidden costs of payment terms.
1. T/T: The "Cash Trap"
Suppliers love T/T. Buyers often think T/T is cheaper because there are no bank fees.
This is a Trap.
- The Risk: If you pay 30% advance deposit via T/T, your cash is locked up for 2 months until the goods arrive.
- The Opportunity Cost: That cash could have been used to buy other profitable stock. T/T drains your liquidity.
2. L/C: The "Paper Shield"
L/C costs money (bank opening charges), but it buys you Security.
- For Buyers: You don't pay until the supplier presents valid shipping documents (B/L). If they don't ship, the bank doesn't pay.
- For Suppliers: Once they ship, the bank guarantees payment. No risk of the buyer disappearing.
Rule: For new relationships, ALWAYS use L/C at Sight. Never use T/T with strangers.
3. The Secret Weapon: Usance L/C (Buy Now, Pay Later)
This is how the big players trade. They don't use their own money.
They use Usance L/C (90 days / 180 days).
💰 The Usance Magic
Scenario: You buy steel with 90-day Usance L/C.
- Day 1: Bank issues L/C to Supplier. (You pay $0).
- Day 30: Goods arrive. You sell them immediately to your local customer for Cash.
- Day 31~89: You hold the cash. You can invest it or buy more stock.
- Day 90: You finally pay the bank.
Result: You traded with Zero Working Capital. This is worth paying a slightly higher price.
Final Thoughts: Cash Flow is King
Don't be proud of getting the lowest price if it kills your cash flow.
Sometimes, paying $10 more for Usance L/C is smarter than saving $10 with Cash T/T.
Profit is an opinion. Cash is a fact.
📉 Finance Insight:
1. ICC (International Chamber of Commerce), "UCP 600 Rules for L/C".
2. Trade Finance Global, "Guide to Usance Letter of Credit".
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👉[Finance #2] Hedging Strategy: Protecting Profit from Forex Risk