Trade Shield | Knowledge Centre SOLUTIONSCost of Funding — How Interest Is Applied to Overdue Debt
? 3 min read 5 questions answered
This article explains, at a high level, how Trade Shield's Cost of Funding figure is worked out — the cost incurred when debtor balances remain unpaid for longer periods. It does not include the underlying calculation logic, which is proprietary to Trade Shield.
In this article
| → What is Cost of Funding? | → How is interest applied to overdue debt? |
| → Why does older debt cost more? | → What interest rate is used? |
| → Is this a debtor-facing interest charge? |
Q1: What is Cost of Funding?
Cost of Funding is the internal cost of having money tied up in unpaid debtor balances instead of being available to the business. The longer a balance stays outstanding, the more this notional cost grows.
Q2: How is interest applied to overdue debt?
Outstanding balances are grouped into aging buckets based on how many days they've been overdue. Each bucket's balance is grown forward using a daily interest rate for exactly the number of days it has been outstanding, and the interest portion is the difference between that grown value and the original balance.
What to do:
- No action is needed from users — this runs automatically in the background.
- The result feeds internal reporting on the cost of carrying overdue debt.
Q3: Why does older debt cost more than newer debt?
Because interest is applied for the full number of days a balance has been outstanding, older buckets (for example, debt that's been overdue for 90+ days) have had more time to accrue interest than a bucket that's only been overdue a week. A balance sitting unpaid for longer will always carry a proportionally higher funding cost than the same balance paid sooner.
Q4: What interest rate is used, and does it change?
The rate is based on the Prime Lending Rate plus a small internal margin, converted from an annual rate into a daily rate. Because it's linked to Prime, the figure moves in line with rate changes from the South African Reserve Bank. The exact margin and calculation method are internal to Trade Shield.
ⓘ Tip: Because the rate tracks Prime, the Cost of Funding figure will shift slightly whenever Prime changes, even if debtor balances stay the same.
Q5: Is this an interest charge added to a debtor's account?
No. Cost of Funding is an internal metric used to understand the cost impact of overdue debt — it is not a fee or interest charge applied to a debtor's outstanding balance.
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