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Definition: Suppliers Credit
Suppliers credit is a financing system in which the can give credit to the foreign importer to finance his purchase. Normally the importer can pay a portion of the value and signs a promissory note to pay the rest on receipt of the goods and on acknowledging acceptance. The importer’s bank is called the presenting bank and the exporter’s bank is called the remitting bank.
The exporter’s bank collects documents and sends to importer’s bank. The importer’s bank gets the acceptance acknowledgement and the pending money from the importer and sends that to the exporter’s bank from where the exporter gets the money minus the transaction fees and other charges. The maximum tenure of suppliers credit in case of capital goods is 3 years and that for revenue goods is 1 year.
The benefits of the suppliers credit include the following
• The importer avails cheaper funds in case of suppliers credit
• The importer has the ability to make the payment to the exporter at sight on receipt of goods
• The importer can gain extended periods of credit
• The importer can also take a closer view on the currency rates, exchange rates and interest rates
The disadvantage of the suppliers credit is that the importer may not inform the bank acknowledging the acceptance and the collecting bank is under no such obligation to enforce such an acknowledgement. However, the exporter may have the right to ship back the goods in those circumstances and loses only the freight charges. The letter of credit normally includes things like amount, validity of the LC, last date of shipment, documents for payment, credit period, special conditions, the names of the banks involved, the place of expiry etc.