Supplier credit is an offer of credit that is extended to a buyer by a seller or supplier. This model is often used in a number of settings, including the importing/exporting business, as well as in supplying goods and services to businesses of all sizes. Credit of this type allows the buyer to receive the products needed now, paying for them later in accordance with the terms and conditions agreed upon with the seller.
One example of supplier credit can be found with the exporting of goods for sale in another country. With this model, the entity selling the goods extends credit to the entity that is purchasing the goods, with the plan of offering them for sale at a profit. The supplier may issue a line of credit to the importer, assuming that the client can demonstrate to the supplier that the importer is credit worthy.
In many cases, this line of supplier credit may be structured in a manner that calls for the importer to pay a percentage of the total contract price up front, and issue some type of promissory note to the supplier for the remainder of the outstanding balance. The importer may also arrange a delayed draft to settle the difference, with the draft set to clear the importer’s bank account at a specified future date. Often, this date will be at a time after the importer believes that the imported goods will be sold at a profit, allowing the transaction to take place without the need for the importer to tie up cash assets in the interim.
This form of self-financing has many benefits for both the supplier and the customer. For the customer, the establishment of a line of credit means it is possible to order what is needed now and pay for it incrementally while earning a return from the use of the items ordered. For the supplier, extending the line of credit means that steady flows of revenue are created, assuming that all customers who are granted supplier credit make timely payments on their outstanding balances.
Like most type of credit situations, supplier credit usually is provided with the provision that finance charges will apply to the outstanding balance in the client’s credit account. The amount of interest charged is normally determined based on governmental regulations that apply in the jurisdictions involved, thus ensuring that customers are not charged an inordinate amount of interest as part of the supplier credit option. This rate of interest is usually competitive with the interest rates the customer would have to pay if some other source of credit were used to manage the purchase.