What is Supplier Credit? Definition, How It Work, 13 Facts

Credit granted by a seller or supplier to a customer is known as supplier credit. This approach is often used in a variety of contexts, including as the import/export industry and the provision of products and services to enterprises of all sizes.

This sort of credit enables the buyer to acquire the necessary goods immediately and pay for them according to the terms and circumstances agreed upon by the seller. The article below will tell you all the information about it in the most specific way

What is Supplier Credit?

Credit granted by a seller or supplier to a customer is known as supplier credit. This approach is often used in a variety of contexts, including as the import/export industry and the provision of products and services to enterprises of all sizes.

What is Supplier Credit?

This sort of credit enables the buyer to acquire the necessary goods immediately and pay for them according to the terms and circumstances agreed upon by the seller.

Example of Supplier credit

The export of commodities for resale in a foreign nation is one instance of supplier credit. Under this approach, the entity selling the commodities offers credit to the entity purchasing the items with the intention of reselling them at a profit. If the client can show to the supplier that the importer is creditworthy, the supplier may provide the importer a line of credit.

Understanding supplier credit

In many instances, this line of supplier credit may be arranged in a way that requires the importer to pay a portion of the whole contract price in advance and issue a promissory note to the supplier for the remaining amount.

To cover the difference, the importer may also arrange a delayed draft, which will clear the importer’s bank account at a future date.

Typically, this date is established when the importer feels the imported items will be sold at a profit, enabling the importer to complete the deal without tying up financial assets in the meantime.

This kind of self-financing is advantageous for both the provider and the consumer. The formation of a line of credit enables the client to purchase what is required immediately, pay for it in installments, and receive a return from the usage of the things bought.

Extending the line of credit creates continuous income streams for the supplier, given that all customers who are granted supplier credit pay their obligations in a timely manner.

Similar to most other types of credit, supplier credit is often granted with the stipulation that financing costs would be applied to the client’s credit account balance.

Typically, the amount of interest charged is established by governmental rules that apply in the relevant regions, ensuring that consumers are not charged excessive interest rates as part of the supplier credit option.

This interest rate is often comparable with the rates the consumer would be required to pay if another source of credit were utilized to finance the transaction.

What is Supplier Credit?

Benefits of Suppliers Credit

For Importer

  • Access to cheaper finances for the import of raw materials and capital goods
  • As you are able to get credit, you may alleviate your short-term financial strain.
  • Capability to negotiate a more advantageous price with suppliers
  • Capable of satisfying the Supplier’s demand for payment upon receipt.

For Supplier

  • Obtain payment on-site.
  • By settling with LC, the danger of importer’s credit is avoided.

How does a supplier Credit work?

The execution of a supplier credit comprises a number of stages, each of which is detailed below.

    1. Supplier and importer come into a contract.
    2. Importer contacts arranger with transaction data to get credit for the transaction from suppliers.
    3. The arranger obtains tentative pricing from a foreign bank, which is confirmed by the importer.
    4. Importer goes to his bank and obtains a letter of credit that is confined to foreign bank counters and includes any other necessary terms.
    5. The Overseas Bank verifies the LC and informs the Supplier’s Bank. Suppliers Bank offers Supplier a copy of the Letter of Credit.
    6. Supplier sends the items and provides the necessary documentation at his bank counter.
    7. The papers are sent from Supplier’s Bank to Overseas Bank.
    8. Overseas Bank post verifies papers for anomalies (according to UCP 600) and sends them to the importer’s bank for acceptance:
    9. Overseas Bank post verifies papers for anomalies (according to UCP 600) and sends them to the importer’s bank for acceptance:
      • If papers match the order specifications, they are discounted and transmitted to the supplier’s bank.
      • In the event that papers do not match, documents are supplied on an acceptance basis. Upon receiving bank approval from the importer, the amount is discounted and sent to the supplier’s bank.
    10. The LC payment is received by the supplier. Depending on who is responsible for paying interest:
      • If the importer bears interest expenses, the provider gets paid in full.
      • If the supplier is responsible for interest expenses, the provider will get the LC amount minus interest.
    11. The paperwork are received by Importer’s Bank. Importer and his bank both accept paperwork. Overseas Bank receives acceptance from Importer’s Bank, which guarantees payment on the due date.
    12. Importer pays his bank at maturity, and his bank pays Supplier’s Credit Bank.

Cost Involved

  • Cost of interest rates charged by foreign banks
  • Foreign Bank LC Cost Confirmation (Case to Case basis)
  • LC advising or Amendment expense
  • Negotiation cost (normally in range of 0.10 percent )
  • Postage and Rapid Delivery Fees
  • Reimbursement Charges
  • Cost for the credit use period. (Indian Bank Cost)

What is Supplier Credit?

Requirement

  • Import transaction governed by the LC Incoterms: FOB/CIF/C&F
  • Arrangement needs to be done before LC becomes opened. If an LC has already been established, the necessary modifications must be made.
  • 41D clause of LC restricts LC to credit-providing suppliers’ banks.
  • Under Payment Term: 90 days Usage fees due at Sight (mention tenure according to tenure and offer received)

Prepayment of Suppliers Credit

Technically, prepayment to Usage LC is permissible if the following conditions are met: However, because there would be a loss of interest for foreign banks, they will not accept a lesser payment. Even if they accept, there will be penalties. Thus, almost no prepayment will be available.

Extract from RBI Master Instructions on the Import of Goods and Services (ii) In the event of prepayment of usance import bills, remittances may only be issued after deducting the proportional interest for the unexpired period of usance at the rate at which interest was claimed or the LIBOR of the currency in which the items were invoiced, whichever is applicable.

Where interest is not individually claimed or clearly stated, remittances may be permitted after subtracting the proportional interest for the unexpired amount of usance at the prevailing LIBOR of the invoicing currency.

RBI Regulations

Norms have undergone several revisions throughout the years. The following is a summary of the present guidelines; for further information, please refer to the article titled “RBI Trade Credit (Buyers Credit / Suppliers Credit) Circular Extract.”

  • Maximum per transaction amount: $20 Million
  • Above $20 Million, RBI Approval needed.
  • Maximum Maturity in case of import of non-capital goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc): upto 1 year from shipping date or operational cycle, whichever is less.
  • Maximum Maturity in the event of the import of capital goods: up to five years from the date of shipping (banks are not permitted to give a Letter of Undertaking or comfort beyond three years).
  • No Rollover / Extension above authorized limitations will be approved.
  • Total-cost Limits: 6 Month Libor plus 350 basis points

How do I handle supplier credits and refunds?

The following section provides steps in handling supplier credits and refunds. Please follow the below scenario depending on which one works best for you. If you are unsure, we recommend speaking directly with your accountant first.

Scenario 1: Link a supplier refund to a supplier credit

Step 1:

  1. Select + New.
  2. Select Supplier Credit.
  3. In the Supplier field, pick the name of the right supplier.
    • Enter the Date.
    • Amount.
    • Account: This account is often the initial expenditure account from the original bill.
  4. Select Save and close.

What is Supplier Credit?

Step 2: Enter the Supplier Refund in the Deposits screen

  1. Select + New.
  2. Select Bank Deposit.
  3. In the Add funds to this deposit section, fill in the following fields:
    • Received from: Select or enter the Supplier name.
    • Account: Select the Creditors (Accounts Payable) account.
    • Amount: Enter the Supplier refund amount.
  4. Select Save and close.

Scenario 2: Pay bills using supplier credits

Step 1: Enter the supplier credits

  1. Select + New.
  2. Select Supplier Credit.
  3. In the Supplier field, select the appropriate supplier name.
  4. Enter the Date, Amount, and Account (the account used here is typically the original expense account on the original bill).
  5. Select Save and close.

Step 2: Pay the bill using the supplier credits

  1. Select + New.
  2. Select Expense or Cheque.
    Note: Both Expense and Cheque recognise and record the expense. When you use Cheque, the transaction adds to the list of cheques that you can print.
  3. In the Choose a payee dropdown, select the supplier name.
  4. Leave the Ref/Cheque no, Date, Amount and Memo fields blank.
  5. In the Add to Expense or Add to Cheque section, select Add for the outstanding bill and the supplier credit.
  6. Select Save and close.

Why do I have supplier credits?

Either return and remove the bill payments and replace them with checks, or input a single or more invoices to connect the bill payments to.

If you entered checks for Suppliers on the Cheques page but did not input invoices, you may wind up with negative balances for Suppliers.

Either return and remove the bill payments and replace them with checks, or input a single or more invoices to connect the bill payments to.

  1. Select + New.
  2. Select Cheque.
  3. In the Payee dropdown, select the supplier name.
  4. Leave the amount field blank.
  5. In the Add to Cheque section, select Add for the outstanding bill and supplier credit.
  6. Select Save and close.

Difference between Buyer’s Credit and Supplier’s Credit

Although both buyer’s credit and supplier’s credit fund the import of capital or non-capital goods and services, there are substantial variations between them.

Both buyer’s credit and supplier credit are granted by foreign lenders to the buyer/importer of goods or services, but there are significant variations between the two.

  1. In the case of buyer’s credit, the importer applies; in the case of supplier credit, the providers of goods/services apply/arrange it.
  2. Buyer’s credit may be obtained after shipping of products but before to the due date, while supplier credit may be asked for prior to dispatch.
  3. The buyer’s credit may be used for any form of payment, including LC, LC Usage, DA, DP, and Direct Document, however the supplier’s credit may only be utilized for transactions secured by Letter of Credit (L/C).
  4. The supplier credit includes a variety of extra costs, such as confirmation fees, document processing fees, LC advising fees, and LC modification fees, but the buyer credit does not.
  5. The buyer’s credit allows for rollovers, which is practical for small importers, but the supplier’s credit does not.

What is Supplier Credit?

Buyer’s Credit vs Supplier’s Credit (Comparison Table):

Parameter Buyer’s Credit Supplier’s Credit
Who applies for? Importer/ Buyer Exporter/ Supplier
When can it be applied? Post-shipment Pre-shipment
Payment Mode LC, LC Usance, DA,
DP/ Direct Documents
L/C backed
transactions only
Additional Cost No such costs Confirmation cost,
processing charges,
LC advising fees,
LC amendment
Rollover facility YES NO

 

Conclusion

A supplier credit is an arrangement in a business transaction wherein an exporter will provide products or services on credit to a foreign customer. Since the exporter is also referred to as a supplier, the ECA nomenclature for this transaction is supplier credit.

Payment on credit terms implies that the overseas purchaser will pay either a lump sum at a later date or a series of instalments on a number of mutually agreed-upon dates in the future.

This sort of business contract comprises the export of products or services from the exporter’s nation and their import into the foreign buyer’s country, since the foreign buyer is from another country.

The export component of this contract is crucial for acquiring ECA coverage against the risk of credit default by the foreign customer. In the context of the ECA, the supplier in the supplier credit transaction is referred to as the exporter, which may be a producer of products, a provider of services, a dealer, or an agency.

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