Key takeaways
- A quote packages price, timing, risk and administration, so the piece price alone cannot rank two offers.
- Convert every payment schedule into dated cash flows from the order date before comparing cost.
- A deposit is an unsecured loan to the supplier. Price the exposure, not the delay.
- Put the agreed trigger, documents and bank charges in the purchase order so the comparison survives the first invoice.
Why the piece price is not the price
One supplier quotes a lower piece price with 40 per cent before production and the balance before shipment. Another quotes a higher piece price with 60 days after delivery. The second offer may be cheaper once you cost the cash and the risk, or it may not. The price column cannot tell you which.
Comparing quotes with different payment terms means rebuilding each offer on one basis. Use the same Incoterm, the same volume, the same delivery date, the same quality assumption and the same cash timeline. Then compare the total cost of the order rather than the unit price.
Longer credit is not always better. A supplier that offers 90 days has funded the order and will recover that cost somewhere, often in the price. See the funding cost and the risk cost separately, then decide whether the package is worth it.
Fix the commercial basis first
Before any cash flow work, put every quote on the same commercial frame. A payment term attached to an EXW price is not comparable with one attached to a DDP price, because the freight and duty sit in different places.
Convert each quote to one reference point. FOB is often cleanest for imported parts because the main carriage, duty and clearance stay visible. If a supplier will only quote DDP, ask for the freight and duty assumptions inside the price.
- Incoterm and named place, converted to one reference basis
- Currency, exchange rate date and price validity
- Volume, release schedule and minimum order quantity
- Lead time measured from order, deposit or drawing approval
- Tooling, samples, inspection and other one-off charges
- Warranty, rejection remedy and the cost of returning bad parts
Turn the schedule into dates and amounts
Every payment term can be written as dated cash flows. A deposit leaves on the order date, a balance before shipment leaves later, and open account leaves after delivery plus the credit period.
Take an illustrative order of 1,000 parts. Quote A is £20.00 per part with 40 per cent on order and the balance before shipment, with shipment six weeks after order. Quote B is £20.30 per part with payment 60 days after delivery, and delivery ten weeks after order. Both exclude freight.
Quote A pays £8,000 at week 0 and £12,000 at week 6. Quote B pays £20,300 at about week 19. At an 8 per cent annual cost of capital, the present cost is about £19,891 for A and £19,723 for B. The higher piece price wins because the money stays in the business for longer.
The order date is the anchor
Measure every payment from the date the order is placed, not from the invoice date. A term that starts at shipment looks longer than it is once production and transit are included.
Put a price on the financing
The discount rate should reflect the cost of the money that funds the order. That may be an overdraft rate, a working capital facility or the return the business would otherwise earn. Use one rate for every quote so the comparison is consistent.
Early payment can be expensive. For illustration, a 2 per cent discount for paying 30 days early is worth roughly 25 per cent annualised. If the business borrows at 8 per cent, that is good value. With spare cash, compare it with the return the cash would otherwise earn.
Financing also appears on the supplier side. A supplier that funds 90 days of material and labour will price that funding, so ask what a longer credit period does to the piece price.
Put a price on the risk
A deposit before production is an unsecured loan to the supplier. If the supplier fails, the money is at risk and there may be no goods to claim. That exposure has a cost even when no bank charges appear on the invoice.
A letter of credit reduces non payment risk, but it adds issuing, advising, confirmation and amendment fees. It also consumes credit lines and staff time, and a discrepant document set can delay shipment. Add those costs before comparing it with a deposit exposure.
Quality risk belongs in the same calculation. A lower price with a weak first article may generate sorting, rework and line stop costs. Apply a stated reject rate to the good parts received.
- Unsecured deposit at risk if the supplier fails
- Letter of credit fees, confirmation and amendment costs
- Credit insurance premium or guarantee fee
- Expected cost of rejects, sorting and replacement
- Working capital tied up in safety stock
A normalisation sheet for each quote
The table below is the checklist used to rebuild each offer. Fill one column per supplier and leave a blank rather than guessing. A blank is a question for the supplier, and it is better to ask before the order than after the first shipment.
| Quote element | What to record | Normalise to |
|---|---|---|
| Piece price | Currency, unit, volume break and validity date | One currency at a dated rate and one volume |
| Incoterm | Three letter term and named place | One reference basis, with the same freight and duty model |
| Payment schedule | Each percentage and the event that triggers it | Dated cash flows measured from the order date |
| Credit period | Days from shipment, delivery or invoice | Actual days from cash out to cash in |
| Bank and instrument costs | LC fees, confirmation, amendment, transfer charges | Added to the cash cost of that option |
| Security | Deposit, guarantee, insurance or standby credit | Costed as a risk charge or an exposure limit |
| Quality remedy | Rejection, rework, replacement and debit note terms | Expected cost at a stated reject rate |
| Price adjustment | Metal index, currency clause and review date | The same index and review basis for every quote |
Qualitative factors such as responsiveness and engineering support still need a separate score. The sheet compares cost and exposure, not the whole relationship.
Score the package, not just the total
A single present cost hides the shape of the deal. Record peak cash exposure, unsecured exposure, administration effort and flexibility if the volume changes. Peak exposure is the most money committed at the worst point. Unsecured exposure is what would be lost if the supplier stopped tomorrow.
For the illustrative pair above, Quote A commits £8,000 before any part exists and holds that exposure for six weeks. Quote B commits nothing before delivery, but it carries a higher nominal price and a payable after the goods arrive. If the programme is cancelled at week four, Quote A may recover part of the deposit and Quote B may have no liability. The cash comparison and the risk comparison point in different directions, which is why both belong on the page.
Negotiate the term, then write it down
Once the package is chosen, put the term into the purchase order in language that can be administered. State the trigger, the percentage, the documents required, the currency, the bank charges and the consequence of late payment. A term that lives only in an email will be reinterpreted at the first invoice.
Agree the review point as well. A term that suits a first order may not suit a repeat programme, and a term that suits a small order may not suit a large one. Review it when the order value, the country risk or the supplier relationship changes.
- Name the event that starts each payment, not just the percentage
- List the documents required for each tranche
- Agree who pays bank charges, amendment fees and transfer costs
- State the late payment consequence and the currency of payment
- Record the price attached to any extended credit period
Frequently asked questions
How do I compare quotes with different payment terms?
Put every quote on the same Incoterm, volume and delivery date, then turn each payment schedule into dated cash flows. Discount them to a common date using one cost of capital, add bank costs and quality risk, and compare total cost and peak exposure.
Is a longer credit period always better?
No. A longer period improves cash flow but usually carries a higher piece price or a security requirement. Compare the financing benefit with the price difference and the risk, because the supplier will recover its funding cost somewhere.
How do I value a deposit before production?
Treat it as unsecured credit to the supplier. Estimate the exposure, the time before goods arrive and the probability of failure, then add a risk charge. If the deposit is large, ask for a guarantee, a standby credit or a smaller first order.
Should bank charges be included in the quote comparison?
Yes. Letter of credit fees, confirmation, amendments and transfer charges change the cost. Add them to the dated cash flows so the comparison reflects what leaves your account.
Sources and further reading
- International Chamber of Commerce, Incoterms 2020
- International Chamber of Commerce, UCP 600
- Qumek trade desk, quote normalisation and cash flow notes
Qumek Trade Desk
Trade and logistics team
The team that handles Incoterms, customs classification, freight and landed cost for Qumek programmes.
Comparing quotes on different payment terms?
Send the price schedules and the proposed triggers. The trade desk will rebuild them on one cash timeline and show the cost and exposure of each option.
Ask the trade desk