Any corporate when importing any product or service levies pressure on their cash flows as they have to work on the product even though they haven’t received any payments. Keeping a track of all other charges like freight or tariffs also complicates while ensuring there is no extra charge while trading overseas.
Supplier’s credit assists in overcoming these difficulties and also relives the stress on the business cash flows. It helps in financing the credit order to the overseas supplier directly there by reducing the cash flow stress.
So in case of a Suppliers Credit, the exporter or the overseas supplier, extends credit directly to the importer or the buyer and there is no financial institutions in between, unlike in the buyer’s credit.
This is done directly from the supplier instead of a bank or a financial institution for imports. The exporter is also the trade creditor. Therefore the exporter doesn’t have to ask for payment under sight Letter of Credit under supplier credit.
The ab-initio contract period should be 6 months for supplier’s credit, which can be rolled over in multiple of 6 months up to 5 years. Banks issue letter of credit (LC) or letter of undertaking (LoU) or letter of comfort (LoC) in favour of overseas supplier, bank or financial institution.
Earlier the tenure allowed for import of raw material was up to 360 days, prior to RBI circular July 13, 2013, many importers used to borrow under buyer’s credit for the period more than what an operating cycle of a unit required as the borrowing rate was cheap, which also exposes them to un-hedged currency risk. Thus in the circular, RBI linked the period of trade credit to operating cycle and trade transactions. This has stopped the rollover of buyer’s credit. It has also stopped importers who were using buyer’s credit facility for arbitrage to earn profits out of it. After the reporting of Punjab National Bank fraudulent transactions of about $2 billion, the $85 billion of Indian buyer’s credit has come to a grinding halt. This gave rise to the supplier’s credit mode of import financing popular.
Myforexeye provides online quotes from 100+ banks through our App to get the lowest supplier’s credit quote for the client. Use non-fund based limits to issue Foreign L/C to bring down financing cost. Avoid unnecessary bargaining & haggling with multiple brokers or banks by availing the Supplier’s Credit Services from us.
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