Suppliers Credit vs Buyers Credit

Suppliers Credit vs Buyers Credit

01 Oct 2018 03:24 PM
 

What is Buyer's Credit?

A short term loan facility extended to an importer for a determined time period by an overseas lender consisting of banks or any other money lending financial institution for trade finance to aid trade operations by providing business capital and facilitating imports of goods and other big-ticket items. The international merchant, to whom the loan is issued is the individual involved in buying goods, and the exporter is known as the seller. Buyer's credit offers an economical approach to importers for securing funds compared to what is available locally and consolidating its stance as a popular and a beneficial trade finance facility. It provides import finance while facilitating the interest of the importers by benefiting their trade operations. In simple terms, buyers credit meaning is a credit facility to support the effectuation of trade operations dispensed to the importer. The rates, including the interest rates incurred by an importer while getting financed domestically might be higher. In contrast, buyer's credit deploys a more advantageous solution in terms of the overall savings due to lower interest rates to an importer. The exporters involved in the trade transactions are also guaranteed timely payments upon utilization of buyer's credit by the importer to support his/her operations associated with a deal entered by both the parties. It also allows the user to carry through large orders that would have been substantially difficult otherwise, thus halting business expansion and growth and enables the importer to obtain financing and flexibility to pay for large orders. 

Buyer's credit process flow

Accessing buyer's credit has its own set of benefits that both the importer and exports involved in the trade experiences including availing finance against import bills, payment security to the exporter wherein the customer should be an existing current account holder in a bank with some exceptional cases in which banks provide buyer's credit even without a current account. The buyer's credit process has a lot of steps involved, the details of which are mentioned below.

  1. The primary step would entail the importer to enter a contract with a supplier for import symbolizing the effectuation of trade between the two parties. 
  2. The following step involves the import of the goods, as mentioned and agreed to in the contract, by the importer under DC / LC, DA / DP or Direct Documents as payment terms. 
  3. After the shipment of the goods, the importer seeks the assistance of a Buyer's Credit Consultant avail buyers credit quote before the arrival of the date for the payment of the bill. The consultant deploys indicative pricing to the importer after approaching and negotiating with the bank.
  4. Upon agreement of the quoted price by the importer, an offer letter is issued by the overseas bank under the importer's name. Another necessary step to be performed by the importer after approaching his bank is to get a Letter of Undertaking/Comfort (LOU/LOC) issued to the overseas bank. The LOC issuing bank can provide confirmation in case the need or request for it arises from the funding bank.
  5. The overseas bank will either direct funds in the already existing  Nostro account or pay the supplier's bank directly using MT202, a SWIFT message format for funds transfer between financial institutions,  payment mode. 
  6. The export bill payment will be made by the existing bank utilizing the credited amount wherein a cross-currency contract is used in case the borrowed currency is different from the currency of imports.
  7. Upon the arrival of the due date, the principal and interest amount will be recovered from the importer by the existing bank with the same being remitted to the overseas bank. 

buyers credit

 

What is Supplier's Credit?

Supplier's Credit implies a type of agreement in a commercial contract involving exporter and a foreign buyer under which the exporter has the job of supplying goods and services to the foreign buyer on credit terms. As the term exporter is interchangeable with supplier, this agreement is called supplier's credit.Overseas bank and financial institutions provide funds to importers at LIBOR linked rates offering a more economical approach compared to locally available funding wherein the funds can be issued against usance letter of credit. Supplier credit meaning is further understood as a structure which facilitates import trade finance wherein the overseas financial institution provides financing to importers in this system. There are numerous benefits of suppliers credit for both supplier and importer as for importer this serves as a means to ease short-term fund pressure by being able to get credit with the availability of negotiating a better price for the suppliers and provides the ability to meet the supplier's requirement of payment at sight. On the other hand, for the supplier's side, it avoids the risk of importer's credit by making a settlement with LC. This supplier's credit facility is provided by foreign banks or the Indian banks which have their respective branches abroad to the importers for the purpose of imports into India. 

Suppliers' credit process flow?

The benefits dispensed to the importer and exporter through supplier's credit encompass realization of payment on sight along with strengthened security against payment default for the supplier while the importer is able to access cheaper funds for import of capital goods and raw material in conjunction with reducing fund pressure. The supplier's credit process flow has a lot of steps, the details of which are mentioned below. 

  1. The first step involves the importer to enter a formal contract with suppliers for the purpose of import.
  2. Then the importer approaches, with transaction details, to the arranger with the intention of getting suppliers credit for the transaction.
  3. After that, the arranger obtains indicative pricing form the overseas banks, needed to be confirmed by the importer. The next step is for the importer to approach his bank for the issuance of LC. This is followed by the overseas bank to provide a clearance of LC and advise LC to Supplier's Bank and the supplier receiving a copy of LC sent by their bank.
  4. The shipment of the goods by the supplier succeeds LC issuance along with submission of required documents at the respective bank counter followed by documents dispatched to the overseas bank by the supplier's bank.
  5. Then the overseas bank post checking documents for discrepancies (As per UCP 600), direct the documents to the importer's bank for acceptance. The documents are discounted and then transferred to the supplier's bank if they are as per the required order.
  6. If the documents are not as per required order, they are sent on an acceptance basis. On receipt of Importer bank acceptance, the same is discounted and transferred to the supplier's bank.
  7. The supplier will receive the payment for its respective LC depending who is bearing the interest cost. The supplier receives the full payment in case the importer is bearing the interest cost. But the supplier will receive an LC amount –Interest in case the supplier is bearing the interest cost.
  8. Importer's bank provides acceptance to Overseas Bank, guaranteeing payment on the due date upon receiving the documents which are accepted by the importer as well as the importer's bank. 
  9. The importer, on maturity, makes payment to his bank with that amount being remitted to  Supplier's Credit Bank.

suppliers credit

 

Difference between Buyer's Credit and Supplier's Credit?

Although both the buyer's credit, as well as supplier's credit, are facilities that extend credit to the importer, the change in their source of credit causes a distinction between them. 

  1. In the case of buyer's credit, the importer of goods applies for it whereas on the other hand exporter of goods applies for supplier's credit.
  2. While the supplier's credit can only be arranged against LC backed transactions, the buyer's credit can be used for payment modes like LC, LC usance, DA, DP, & Direct Document.
  3. Another major point of difference is that buyer's credit can be arranged only when the necessary documents have reached the bank while the supplier's credit can be arranged before the shipment and at the time of opening of LC. 
  4. The charges incurred by the individual is another differentiating factor with supplier's credit imposing additional fees including Confirmation Cost, LC Amendment, Charges Document Processing Charges, LC Advising, Cost Courier Charges, and Interest Cost whereas only interest cost will encompass the added cost in case of buyer's credit but it simultaneously carries the risk associated with currency.
  5. Getting supplier's credit might not be a feasible possibility for small importers which is not the case with the buyer's credit. Moreover, the buyer's credit offers the feature of a rollover facility.
  6. The differentiation observed on the basis of operationality of both facilities magnifies the application of supplier's credit as a financing facility since the buyer's credit is no longer viable due to being non-functional. 

The trade financing services including Buyer's credit and supplier's credit extended by Myforexeye provide a convenient solution through an easily navigable platform dispensing easy access for acquiring best quotes from overseas banks requiring minimal steps and no additional charges to individuals involved in the export and import industry. The Forex Current Account enhances the scale of your business by allowing cross border forex transactions along with the availability of real-time forex rates that fortifies your understanding of the value that one can expect upon payment associated with overseas trade upon the determined period of deal maturity.

Conclusion

Myforexeye is the one-stop solution for all the forex needs of organizations irrespective of their scale and individual forex enthusiasts wherein our services discharged are powered by advanced technology, armed with the expertise of experienced professionals and executed by our specialized team. Our user-friendly platforms- web portal and mobile app encourage actualization of our objective of providing a transparent streamlined process which meets the forex demands of users in a convenient manner eliminating the aspect of hidden commissions. Our consultants help users manoeuvre challenges and risks associated with the forex market and render strategies and techniques to mitigate them. Enabled by our lack of obscurity, our services empower users to make savings corroborated by our platform that provides an insight into real-time rates and best quotations from banks to equip you with the best possible options.

Speak to one of our specialists to acquire a detailed understanding of Trade Finance services extended by Myforexeye.

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