Finance is one of the biggest challenges of import/export trading. It almost always involves dealing in large quantities of wholesale goods, and thus, it is known as a capital-intensive form of trade. Most buyers (importers) use different forms of credit, which means that the supplier (exporter) is tying up large amounts of cash in just a few transactions. Running this type of business with limited resources makes expansion difficult, which is where import finance comes in handy.
Import finance refers to several forms of credit options that allow import traders to gain access to cash reserves needed to further business objectives and grow their businesses. One such option available to the importers to avail trade finance is Supplier’s Credit.
What is Suppliers Credit?
Supplier’s credit is a type of arrangement under which the overseas suppliers or financial institutions, preferably from the seller’s country, finance the importers at cheaper rates than the local funding source. It has many advantages for both sellers and importers. For importers, it provides a way to relieve short-term fund pressure by allowing them to get credit with the ability to negotiate a better price with suppliers and to meet the supplier’s requirement of payment on sight.
On the contrary, for the supplier’s side, it dodges the risk of importer’s credit by making a settlement with LC. A letter of credit is a documentary credit that provides detailed information about a transaction and is usually restricted to overseas FI counters. Furthermore, since the issuance of LOUs (letters of undertaking) has been prohibited, importers are turning to supplier’s credit, which offers lower interest rates than buyer’s credit.
Why Supplier’s Credit?
- Quick payments through MT760
- A part of the transaction is paid at sight, and the remaining amount is paid as per the terms and conditions agreed with the seller.
- Different clauses such as Reimbursement Clause, Negotiation Clause, and Confirmation Clause are included under this. LC Clauses might need to be included/amended as required by the supplier’s credit offering bank.
- An inexpensive source of funds
- As only imports under LC qualifies for supplier’s credit, the risk in the process is lessened.
Process Flow of Supplier’s Credit
The supplier’s credit process flow has a lot of steps, which are mentioned below:
Step 1: The importer (buyer) enters into a formal contract with suppliers for the purpose of import.
Step 2: With the transaction details, the importer then approaches the arranger intending to get the supplier’s credit for the transaction. After this, the arranger obtains indicative pricing form the overseas banks, which is needed to be confirmed by the importer.
Step 3: The importer gets in touch with his bank for the issuance of LC. Following that, the overseas bank provides a clearance of LC and advises LC to supplier’s bank, and the supplier is getting a copy of the LC sent by their bank.
Step 4: The supplier’s shipment of goods follows LC issuance along with submission of requested documents at the respective bank counter, with documents then being dispatched to the overseas bank by the supplier’s bank.
Step 5: After checking the documents for discrepancies, the overseas bank sends the documents to the importer’s bank for acceptance. If the documents are in order, they are discounted and then transferred to the supplier’s bank account.
Step 6: In case the documents are not as per the required order, they are sent on an acceptance basis. The same is discounted and transferred to the supplier’s bank upon receipt of Importer bank approval.
Step 7: Depending on who bears the interest cost, the supplier will receive payment for its respective LC. If the importer pays the interest, the supplier gets the entire payment. However, if the supplier is paying the interest, the supplier will be paid an LC amount –Interest.
Step 8: Overseas Bank receives acceptance from the importer’s bank, ensuring payment on the due date after receiving the documents that are approved by both the importer and the importer’s bank.
Step 9: On maturity, the importer makes a payment to his bank, which is then remitted to the Supplier’s Credit Bank.