Supplier credit can be used in import/export business.
Supplier credit is an offer of credit given to a buyer by a seller or supplier. This model is often used in a variety of environments, including import/export business, as well as providing goods and services to companies of all sizes. This type of credit allows the buyer to receive the products he needs now, paying later in accordance with the terms and conditions agreed with the seller.
An example of supplier credit can be found with the export of goods for sale in another country. With this model, the entity selling the commodity extends credit to the entity acquiring the commodity, with the plan to put it up for sale at a profit. The supplier may issue a line of credit to the importer as long as the customer can demonstrate to the supplier that the importer is creditworthy.
In many cases, this supplier credit facility can be structured so that the importer prepays a percentage of the total contract price and issues some sort of promissory note to the supplier for the remainder of the outstanding balance. The importer may also arrange for a late withdrawal to settle the difference, with the withdrawal set to clear the importer’s bank account at a specified future date. Often, this date will occur at a time after the importer believes that the imported goods will sell at a profit, allowing the transaction to take place without the need for the importer to tie up monetary assets in the interim.
This form of self-financing has many benefits for both the supplier and the customer. For the customer, establishing a line of credit means that they can order what they need now and pay for it incrementally, earning a return on the use of the ordered items. For the supplier, extending the line of credit means that stable streams of revenue are created, assuming all customers who receive supplier credit make timely payments of their outstanding balances.
As with most credit situations, supplier credit is usually provided on the condition that finance charges will be applied to the debit balance on the customer’s credit account. The amount of interest charged is typically determined based on applicable government regulations in the jurisdictions involved, thus ensuring that customers do not pay an excessive amount of interest as part of the supplier’s credit option. This interest rate is generally competitive with the interest rates the customer would have to pay if some other source of credit were used to manage the purchase.