Commercial Banking Charges, L/C Discounting & Interest Costs

Every export order passes through a bank, and the bank charges for the passage. The charges arrive as small lines on a bank statement, weeks after the shipment, and factories that never priced them discover at the year end that a slice of margin went to the bank. The discipline of this lesson is to price the bank block before the order is accepted, in the same way as fabric or freight: flat charges, percentage commission, discounting interest, and working capital interest, each calculated, each divided to a per-garment figure, each shown on the sheet.

Take the woven casual shirt order from the previous lessons: 10,000 pieces at BDT 719.40 FOB, an order value of BDT 7,194,000, all figures illustrative. By the end of this lesson the bank block on that order totals BDT 24.77 per garment, which is larger than the BDT 18.00 commercial cost allowance on the original FOB sheet. That gap is the point of the lesson: a commercial allowance that does not contain the bank block is an allowance that will be exceeded.

A letter of credit carries two kinds of charge. Flat charges do not depend on the order size: the advising fee, typically a fixed amount per credit, is the main one. Percentage charges grow with the order: the negotiation commission, charged on the bill value when the bank checks documents and advances payment, is the main one. Convert the order value to the credit currency first, because bank charges are calculated on the bill value in that currency. At BDT 120 per dollar, the shirt order value of BDT 7,194,000 becomes USD 59,950.

Apply the schedule, all figures illustrative: advising USD 100.00 flat, negotiation at 0.125 percent of the bill value. The commission is 59,950 multiplied by 0.00125, which is USD 74.9375, rounded half-up to USD 74.94. Total bank charges are 100.00 plus 74.94, which is USD 174.94. Divide by the order quantity: 174.94 divided by 10,000 is USD 0.017494 per garment. Convert back: 0.017494 multiplied by 120 is BDT 2.09928, rounded half-up to BDT 2.10 per garment.

Notice the shape of the two charges. The flat advising fee falls per garment as the order grows: USD 100 on 10,000 pieces is one cent per garment, but on 1,000 pieces it would be ten cents. The percentage commission stays constant per garment at any size. A factory quoting small orders must therefore carry a heavier flat-charge burden, and a quotation that copies a large-order bank allowance onto a small order understates the cost.

A sight letter of credit pays on presentation. A usance letter of credit pays after a stated period, such as 60 or 90 days, and the factory that wants its money early asks the bank to discount the bill: the bank advances the money now and deducts interest for the waiting period. The formula is bill value multiplied by annual rate multiplied by usance days divided by 360, using the money market day-count the bank applies.

For the shirt order at 90-day usance and 8 percent, all figures illustrative: 59,950 multiplied by 0.08 is 4,796.00, and 4,796.00 multiplied by 90 divided by 360, which is 0.25, gives USD 1,199.00 of discounting interest. Divide by the order quantity: 1,199.00 divided by 10,000 is USD 0.1199 per garment. Convert: 0.1199 multiplied by 120 is BDT 14.388, rounded half-up to BDT 14.39 per garment.

The same formula prices every usance term, and the table in this lesson shows the ladder: sight costs BDT 2.10 per garment in bank charges alone; 60-day usance adds discounting of USD 799.33, which is BDT 9.59 per garment, for a total of BDT 11.69; 90-day usance adds BDT 14.39 for a total of BDT 16.49; 120-day usance adds discounting of USD 1,598.67, which is BDT 19.18 per garment, for a total of BDT 21.28. Each extra month of usance costs roughly BDT 4.80 per garment on this order, and a buyer who asks for 120 days instead of sight is asking the factory to fund almost BDT 20 per garment of interest.

Discounting is not the only interest on an order. The factory buys fabric months before the buyer pays, and the money tied up in that fabric carries interest whether or not the quotation shows it. Take the shirt fabric: BDT 414.00 per garment multiplied by 10,000 pieces is BDT 4,140,000 of fabric, bought 60 days before shipment in this example, financed at 12 percent per year, all figures illustrative.

The calculation is 4,140,000 multiplied by 0.12, which is 496,800.00, multiplied by 60 divided by 360, which is one sixth, giving BDT 82,800.00 of interest. Divide by the order quantity: 82,800 divided by 10,000 is BDT 8.28 per garment. That interest is real money paid to the bank or lost to the overdraft, and it belongs on the quotation sheet next to the fabric line that caused it. Trims and other materials bought early carry the same logic on a smaller scale, and a complete sheet adds them as a single allowance line once the fabric interest is calculated.

Add the three lines for the shirt order: bank charges BDT 2.10, discounting interest BDT 14.39, working capital interest BDT 8.28. The total is 2.10 plus 14.39, which is 16.49, plus 8.28, which is BDT 24.77 per garment. Multiply back to the order: 24.77 multiplied by 10,000 is BDT 247,700 of bank and interest cost on one order.

Now compare that total with the commercial cost allowance on the original FOB sheet, which was BDT 18.00 per garment. The bank block alone exceeds the allowance by 24.77 minus 18.00, which is BDT 6.77 per garment, or BDT 67,700 on the order. The original sheet was not wrong about testing or documentation; it was wrong because it never contained a bank block at all. The correction is mechanical: either raise the commercial allowance to cover the bank block, or show the bank block as its own line and re-price the FOB sheet. Either way, the order must be re-quoted before acceptance, not explained after closing.

A sweater factory in Dhaka accepted a 120-day usance letter of credit without pricing the discounting cost, because the buyer presented usance as a standard term and the merchandiser did not want to argue. When the bank discounted the bill, the interest removed almost the entire profit margin, and the cash shortage delayed fabric buying for the next order. The factory had not lost money on sewing, on fabric, or on quality. It had lost money on a payment term nobody priced.

The defence is a term ladder on the quotation template: sight, 60-day, and 120-day usance each with a known per-garment bank cost, computed from the same formulas as this lesson. When the buyer asks for a longer term, the merchandiser reads the ladder and either reprices the order or negotiates the term, instead of absorbing the interest silently. A payment term whose cost is not on the sheet is a margin the factory has already given away, and no factory can afford to give margin away unknowingly.

Two small disciplines prevent systematic understatement. First, use the bank day-count of 360 days in the discounting formula, not the calendar 365, because the bank charges on 360. Using 365 understates the interest by about 1.4 percent on every bill, which is BDT 0.20 per garment on the shirt discounting line and a larger sum across a season. Second, keep currencies separate within the bank block: calculate charges in the credit currency on the bill value, then convert the per-garment result at the stated rate. Mixing a taka FOB value with a dollar commission in one line produces a figure that belongs to neither currency and cannot be checked.

Bank charges, discounting interest, and working capital interest are real costs of an export order. Get the bank schedule in writing each season. Calculate flat and percentage charges on the bill value, price the usance period at the bank day-count, price the fabric financing gap, and total the block per garment. Compare the total with the commercial allowance on the FOB sheet and re-price if the allowance is short. A payment term whose cost is not on the sheet is a margin already given away, and a factory that prices its bank block keeps its margin in every term it accepts.