Supplier’s Credit

Supplier’s Credit is a financing arrangement under which exporter or overseas bank extends credit to importer for his purchases. Here LC is being issued by importer’s bank, in which they undertakes to pay to supplier or overseas bank after the usance period as agreed in the LC terms.

If same is funded by overseas bank, the exporter gets the payment at sight basis and importer needs to repay to overseas bank after the usance tenor.

Advantages of Supplier’s Credit

Importers get sufficient time for payment so their cash flow is not affected. Exporter gets payment on due date, Able to meet the Suppliers requirement of payment at sight.

Since exporter is getting early payment, Importer can negotiate terms with him.

The funds can be arranged from any bank, which might be cheaper compared to credit extended by supplier as usance period

Advantages

The importer can use this financing for any form of trade viz. open account, collections, or LCs.

There is no need of separate LOU to be sent. And LC usance charges are generally lower than LOU charges, so overall costing can be lower compared to buyer’s credit.

Exporter can avoid the risk of importer’s credit as settlement is backed by L/C

Process Flow

Buyer's Credit
Agreement for Supplier's Credit

Importer takes consensus from supplier for doing import based on L/C, where funding arrangement will be made through foreign bank, which will make the L/C at site for supplier and provide usance period to importer.

Send Query
Send Query to FinByz

Once concensus is arrived between buyer and supplier, regarding L/C terms the importer should approach FinByz Consulting for best possible quote along with amount, tenor and LC opening Bank.

Quote Letter
Get Quote Letter from Funding Bank

Based on confirmation on tentative quote from customer, FinByz Consulting will arrange the quote letter at lowest possible interest rate from overseas bank/branches (Funding bank).

Request your Banker
Opening LC as per Offer Letter

Based on importers request, the importer’s bank will open L/C, where funding terms will be specified in L/C as per quote letter.

Bank Sends LOU
LC Advising and Negotiation

Once goods are imported, the L/C can be negotiated through funding bank, supplier’s bank or buyer’s bank as per terms mentioned in L/C.

Funding Done
Funding Done!

Based on successful LC negotiation with required set of documents as mentioned in L/C, the funding bank will fund the account of Supplier and provide interest advice to importer’s bank.

Payment to Supplier
Payment at LC maturity

On maturity date the importer’s bank will recover the Supplier’s credit amount with interest from importer and remit it to funding bank.

Repayment
Repayment

On maturity date the importer’s bank will recover the buyer’s credit amount with interest from importer and remit it to funding bank.

Costing

Interest Cost

Interest Cost

Cost to be paid to funding

Generally quoted as Libor + Spread. Eg. 6M Liobr + 120bps. Here if 6 month libor is 0.70% than total interest cost going to be 0.70% + 1.20% = 1.90% p.a.

financial risk

LOU Charges

Charges levied by importer's bank

These guarantee charges depend upon credit worthiness and are highly negotiable. These charges mostly vary between 0.1% to 3% p.a.

financial risk

Hedging Cost

Filter out the noise to get the information which matters.

As USD is trading at premium the same should be considered as additional cost. Its market quoted and has been ranging between 5-7% p.a.

RBI Regulations

RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange Management Act, 1999, stating that authorized dealers (Banks) may approve proposals received (in Form ECB) for short-term credit for financing—by way of either suppliers’ credit or buyers’ credit—of import of goods into India, based on uniform criteria. There has been some revisions in interest rate ceiling for the buyer’s credit transactions, according to latest guidelines criteria for availing buyer’s credit revised as below.

Amount of credit should not exceed $20 million, per import transaction; the `all-in-cost’ per annum. All applications for short-term credit exceeding $20 million for any import transaction are to be forwarded to the Chief General Manager, Exchange Control Department, Reserve Bank of India, Central Office, External commercial Borrowing (ECB) Division, Mumbai .
Maximum allowed tenor for non-capital goods is 1 year from the date of shipment and in case of Capital goods the credit can be taken for 3 years from the date of shipment.
Maximum all in cost interest for any such credit should not exceed 6M LIBOR + 350bps. All cost ceiling includes arranger fee, upfront fee, management fee, handling and processing charges, out-of-pocket and legal expenses, if any.

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Mukesh Variyani

About the Author: Mukesh Variyani

A result oriented professional with of experience in Forex Risk Management and Debt Syndication. Having insights of both Corporate and Banking side of Treasury management I help corporates to optimise the strategies of financial risk management and debt syndication through FinByz Consulting.