SUPPLIERS CREDIT

Suppliers Credit

With a supplier's credit, the exporter offers the buyer its goods including financing. It sells its claim under the supplier's credit to its bank to raise liquidity. The financing terms of the supplier's credit are already included in the supply agreement, which simplifies the formalities. The supplier's credit is therefore suitable particularly for smaller export transactions.

Five parties are generally involved in a supplier’s credit:

1.      Exporter/Supplier- The Supplier wants to export products or services

2.      Importer/Buyer- It's registered abroad and wants to import the supplier's goods

3.  Export Risk Coverage Insurance- export risk insurance that covers political, transfer, credit, manufacturing and other risks.

4.      Financing Bank that buys exporter claim

5.   Buyer’s Bank that issue bank guarantee to financing bank to cover the risk of non-payment.

Mechanism of Supplier’s Credit:

1.  Buyers and suppliers make a contract for a supply of goods with mentioning grants the buyer for a loan. As per contract the supplier’s credit is to be secured by a payment guarantee from buyer’s bank.

2.   As per buyer’s request buyer’s bank issue a guarantee in favour of supplier in case of non-payment by the buyer.

3.   The supplier applies Export Risk Coverage Insurance for political, transfer and credit risk.

4.    After then exporter makes an agreement with his bank by concluding an export finance agreement.

5.  The buyer makes an advance payment directly to supplier before the first delivery.

6.   Then delivery of goods is done as per pre agreed contract.

7.   The financing bank informs firstly the importer about the claims under the supply agreement and secondly it advices the importer’s bank that the guarantee proceeds assigned to financing bank.

8.   After advance payment and delivery, financing bank transfers the amount of the supplier’s credit to the exporter.

9.      The importer repays the supplier’s credit directly to financing bank.