Supplier credit can be used in import/export business.
Supplier credit is an offer of credit made to a buyer by a seller or supplier. This model is often used in a variety of settings, including import/export businesses, as well as supplying goods and services to businesses of all sizes. This type of credit allows the buyer to receive the products he needs now, paying later according to 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 that sells the product grants credit to the entity that purchases the product, with the plan of putting 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 line of credit can be structured so that the importer pays a percentage of the total contract price up front and issues some type of promissory note to the supplier for the remainder of the outstanding balance. The importer can also arrange for a late withdrawal to settle the difference, with the withdrawal set to settle the importer’s bank account on a specified future date. Often this date will occur at a time after the importer believes that the imported goods will be sold at a profit, allowing the transaction to proceed without the need for the importer to immobilize monetary assets in the interim.
This form of self-financing has many benefits for both the provider and the client. 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 provider, extending the line of credit means that steady streams of income are created, assuming that all customers receiving credit from the provider make timely payments on their outstanding balances.
As with most credit situations, vendor credit is generally provided on the condition that finance charges be applied to the customer’s credit account debit balance. The amount of interest charged is generally determined based on applicable government regulations in the jurisdictions involved, ensuring that customers do not pay an excessive amount of interest as part of the provider’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 arrange the purchase.