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How Suppliers Credit can put Importers business back to Track?

Suppliers Credit: An importer initiates his business with the intention of accomplishing huge returns for the investments made. To fulfill the demand and needs of a country, the resources within a geographical border might not be sufficient, this space between the demand and supply is viewed as a profitable market in a business perspective by the traders. In the aftermath of the Central bank (RBI) forbidding the issuance of LOU’s for trade transactions, the Importers business was disrupted with the non-availability of immediate fund requirements for their working capital needs. Though a little time-consuming process, Suppliers credit backed by LC which is a similar option to Buyers credit has come to the rescue of small Importers. What is Suppliers Credit? The trade finance facility made available to the Importer to brings the goods into India based on the usance of Letter of Credit(LC) is known as Suppliers Credit. Here, the credit is funded by the overseas financial institutions or the sellers preferably from the seller’s country at a cost close to Libor rates which are cheaper than the local source of funding. How will Suppliers Credit help the Importers? Suppliers credit service can be availed only when it is backed by LC (Letter of Credit) which is an agreement comprising the details of the transactions. Also, the interest rates for the funding process is kept minimal, which is similar to buyers credit services with slightly varied costs. Tenure for Capital and Non-Capital Goods  A maximum tenure of 3 years is allowed for all the Capex transactions. A maximum tenure of up to 1 year/ 360 days is permitted for the Non-capex transactions from the date of the shipment. Transactions up to $20 million dollars are allowed, anything beyond the sanctioned limit requires RBI approval. Benefits / Advantages of Suppliers Credit The exporter/suppliers are dealt on sight basis Importer’s business is financed with short-term credit Importers can negotiate and settle for a better deal Financed in foreign currency close to Libor rates A low-cost source of credit significantly cheaper than the local funds Backed by LC guarantee which mitigates the risk to a certain extent Process Flow / Workflow for Availing Suppliers Credit  When an Importer requires credit after entering into a contract with the Supplier, he approaches SaveDesk (arranger) to avail Suppliers credit along with the relevant transactions details. SaveDesk, from an overseas financial institution, offers the best deal to the Importer. On acceptance of the offered price, the Importer gets an LC guarantee issued with his bank which is confined to the lending financial counters. Once the goods are shipped, the Supplier submits the necessary documents at his bank. Further, the documents are scrutinized by the lending overseas financial institution. On account of acceptance of documents and repayment as per as the LC terms by the Importer’s bank,the lending bank discounts the bill. The payment is remitted to the respected Supplier based on the LC terms. On the required due date, the Importer makes his payments to his bank which in return is settled to the lending overseas financial institution. Cost / Charges Involved in Suppliers Credit Interest cost i.e. LIBOR LC Advisory charges: which will be charged around 0.1- 0.5% Courier/Postage/Swift charges Corresponding bank charges: (Depends on bank networks) LC confirmation charges: ranges around 0.3% to 1.1% (optional) Indian Bank interest cost Documentation handling charges Negotiation charges A wise businessman takes the market arbitrage and imports goods and materials from other countries by availing low-cost loans (Suppliers credit) that would work out better for him. It can be the import of machinery equipment, raw materials anything from outside to make profits within the domestic boundaries.
How Suppliers Credit can put Importers business back to Track?
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How Suppliers Credit can put Importers business back to Track? 441 How Suppliers Credit can put Importers business back to Track? Blog
Saurabh Jain May 30, 2018
Suppliers Credit: An importer initiates his business with the intention of accomplishing huge returns for the investments made. To fulfill the demand and needs of a country, the resources within a geographical border might not be sufficient, this ...
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Why Suppliers Credit Is Crucial For Importer Business?

The concept of imports and exports serves the purpose of fulfilling the domestic demands by mutually sharing the resources and commodities between two national borders. To facilitate easy trade finance to the importers of India the government had structured buyers credit funding process. After divulging the PNB biggest buyers credit scam, there has been a surge of prices and stringent practices followed by the RBI which has significantly disrupted the Indian importers. Nevertheless, another similar option is available to the importers to avail trade finance, which is popularly known as Suppliers credit. What is Suppliers Credit? Suppliers credit is a trade credit funded to the importer on basis of Letter Of Credit (LC). Under the LC method of payment, the overseas suppliers or financial institutions preferably from the seller’s country finances the importers at cheaper rates than the local source of funding, which are close to Libor rates. It is beneficial to the seller as he receives payments immediately after the shipment of goods, which in turn helps the importer to negotiate for better prices. Since the issuance of LOU(letter of undertaking) has been banned, the importers are switching  to avail suppliers credit facility which also aids in availing cheap interest rates like buyers credit. Why suppliers credit?/Advantages of suppliers credit: The exporter/suppliers are dealt on sight basis Importers can negotiate for better commercial terms. Low-cost source of funds As only imports under LC qualifies for suppliers credit the risk in the process is mitigated. The letter of credit is an assurance issued which includes detailed information of the transaction and is generally restricted to overseas FI counters. Suppliers credit can be availed by the importers on both capital/non capital goods up to USD 20 million per transaction. The payments here are processed through international payment networks known as SWIFT(Society for Worldwide Interbank Financial Telecommunication code). Differences between Buyers Credit and Suppliers Credit: Buyers Credit Suppliers Credit Swift payments through MT799 Swift payments through MT760 Credit is funded to the importers nostro account Portion of the transaction is paid at sight, the rest of it is paid in accordance with the terms and conditions agreed with the seller (drafts, promissory notes etc). Additional clauses or Amendments are not required in LC Negotiation Clause, Reimbursement Clause and Confirmation Clause are covered under this. LC Clauses might need to be included/amended as requested by suppliers credit offering bank   Payments were allowed to be made on the due date to the exporters Supplier/exporters are paid at sight With the non-availability of the buyers credit trade facility, the importers were put under inconvenience. Now, the importers are availing suppliers credit which has evolved to be a new revolution in the importers trade finance facility.  
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Why Suppliers Credit Is Crucial For Importer Business?

Why Suppliers Credit Is Crucial For Importer Business?

Saurabh Jain
The concept of imports and exports serves the purpose of fulfilling the domestic demands by mutually sharing the resources and commodities between two national borders. To facilitate easy trade financ...
Continue reading

Export Credit : Fundamentals, Risks Involved And Ways To Mitigate Them

Companies that uphold exporting have to be skillful with their approach as they embrace huge risks. These companies have to follow the requirements and have to be committed to their export operations. If you are intending to extend your export credit, here is a watch over on how export credit agencies work, risks covered by exporters and ways to mitigate them. EXPORT CREDIT AGENCIES: Export credit agencies (ECA) can be referred as intermediaries mediating between a nation’s government and the exporters. There are about 85 export credit agencies approximately around the world. ECAs comprise of financial institutions supporting international export activities by funding domiciliary companies. These agencies are also known as investment insurance agencies, could be private or quasi-governmental institutions. ECAs promote international trade in the form of crediting insurance and guarantee arrangements or both, often referred as “pure cover” which depends on the directions provided to ECA. Shifting risks by the virtue of premiums from the corporations, they tend to encourage foreign trade by promoting investments in areas where corporations fail. These agencies often involve in a few risks that are sustained by the supporting country’s government. Large risks, other than any normal transactions, will be inspected by a committee of government or authorised officials. ECA adopts three methods to funds- Direct funding- This is the basic structure where the loan is customized for the purchase of goods and services in the arranging country. Financial intermediary- This involves a financial intermediary that lends to the importing entity. Interest rate Equalization- A commercial money monger grants loans less than the market rates. Later, he is secured with the difference amount between the market rate and the commercial rate. Export credit agencies limit their risks by not funding to risky countries. In case of non-compliance with the provisions described in the policy, claims on the losses of uncovered portions may be refused. “By using ECAs, exporters can sell on more liberal terms than cash in advance policies, and  still have a high degree of certainty that they will get paid.” -World’s Export Credit Agencies”,written by- William A. Delphos provides this insight, RISKS INVOLVED IN EXPORT BUSINESS AND WAYS TO MITIGATE THEM: The most common risk of all is the payment risk. This can occur when the customer dodges payments for operational reasons. The best way to secure this risk is by a well-written contract. It cannot be recovered with credit insurance. Even after the beneficiary satisfying the terms and conditions, there can be risks of defaults on payments by the issuing bank.  Hence, the exporter is issued with confirmation of Letter of Credit that assures his payments. Bad debts disturb profitability and can adversely affect the payments in international trade. Therefore, to mitigate this, it is always expected to keep alternatives like confirmation of LC, credit insurance or debt purchase (factoring without recourse of forfeiting). The banks would have formerly advanced the funds in the debt purchase transaction, where it is without recourse. Here, the banks or the financial institutions take the risk of nonpayment. The exporter has to be very sure dealing with creditworthiness of the foreign buyer, predominantly because international business covers large distances and unusual environments. If the creditworthiness is unknown, there are high risks of non-payments or fraud involved. To soften the process, you can aid from a few commercial firms in assisting on credit-checking and secure payment methods such as an irrevocable documentary credit.    In the course of shipment, there can be theft, damage or non-arrival of goods. It is very important for the exporter to understand the transportation and logistic risks in particular the “contract of carriage”.  It is always better to request pre-shipment inspection to secure both importers and exporters interest. There can be chances of rejecting the arrived shipment and non-payment due to poor quality.    The exporter should be aware of the legal formalities of the contract as international laws and regulation change frequently and are enforced differently from the exporter’s country. The exporter’s interest can be  secured by covering all legal and political risks. International business embraces two different currencies, changes in exchange rates has negative impacts on both the factors and one of the factors will derive benefit ultimately. To overcome this,  it is optimum to quote in one’s very own currency and hedge through the purchase of “forward exchange rate” contracts. There can be a few countries with constraints upon their foreign currency reserves while they are advanced towards more open markets. In such cases, there can be non-payment to the exporter due to non-sufficient foreign exchange for payments by the Reserve or Central bank of the importing country. If the banks are not solvent, then they can not meet their financial commitments. In such cases, transactions pertaining to cash against LC and guarantees may not be honored, which can contribute to outstandings. Loss might be faced by the exporter if there are any occurrences of natural disaster or unexpected terrorist actions destroying export market for a company. These are some of the unforeseen risks that exporters should be aware of. In any international contract, it is necessary to ensure that the force majeure clause is included
Rated /5 based on 20 customer reviews
Export Credit : Fundamentals, Risks Involved And Ways To Mitigate Them

Export Credit : Fundamentals, Risks Involved And Ways To Mitigate Them

Kranthi Tilak Reddy
Companies that uphold exporting have to be skillful with their approach as they embrace huge risks. These companies have to follow the requirements and have to be committed to their export operations....
Continue reading

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