Supplier credit is a form of export finance in which the exporter (the supplier) agrees to let the foreign buyer pay for goods or services over time, rather than on shipment. The credit relationship is between the exporter and the importer: the exporter books a receivable, waits for instalments, and carries the risk that the buyer does not pay, unless it insures, guarantees or sells that receivable.
Supplier credit is the opposite structure to buyer credit, in which a bank lends to the importer so that the exporter is paid in cash. Short supplier credit, measured in weeks or months, is ordinary open-account trade on supplier-payment terms. In trade finance usage, the term usually refers to medium-term credit of one to five years for machinery, vehicles and other capital goods, often backed by an export credit agency (ECA).
Supplier credit in plain terms
A furniture shop that lets a customer take a sofa home today and pay in twelve monthly instalments is giving supplier credit. The shop, not a bank, is waiting for the money, so the shop worries about whether the customer will keep paying.
Exporters do the same with foreign buyers, especially when the buyer cannot afford to pay in one go for a large machine. To avoid running short of cash themselves, exporters usually find someone to share the burden: an insurer that pays if the buyer defaults, or a bank that buys the instalment promises for cash today. The buyer still sees one simple deal with the supplier, which is the main attraction of this structure.
How supplier credit is structured
A typical medium-term supplier credit has these features:
- Down payment. The buyer pays part of the price in advance or on shipment; for officially supported deals, the OECD Arrangement has traditionally required at least 15%.
- Instalments. The balance is repaid in equal instalments, often half-yearly, with interest built into the price or charged separately.
- Payment instruments. Each instalment is evidenced by a promissory note or an accepted bill of exchange, which makes the claim easy to transfer.
- Security. The instruments are guaranteed by the buyer's bank, or payment is made under a deferred payment usance letter of credit, or the exporter takes out export credit insurance.
The exporter's commercial contract and the credit terms are one document, so the exporter negotiates price and financing together.
Refinancing supplier credit
Few exporters want to fund multi-year credits from their own working capital. Common ways to convert the receivable into cash are:
- Forfaiting. Selling bank-guaranteed notes or bills without recourse through forfaiting.
- Discounting. Having its own bank discount the bills, often with recourse, through export bill discounting.
- Insured refinancing. Assigning an ECA supplier credit policy to a bank, which then lends against or buys the insured instalments.
Each of these is a form of post-shipment finance. Where the refinancing is without recourse, the receivable can leave the exporter's balance sheet; where it is with recourse, the exporter keeps the credit risk and the bank lends against it.
Supplier credit and buyer credit compared
| Feature | Supplier credit | Buyer credit |
|---|---|---|
| Who lends | The exporter, then refinanced | A bank, directly to the buyer or its bank |
| Exporter's receipt | Instalments, unless sold | Cash on shipment or milestones |
| Documentation | One commercial contract with credit terms | Separate commercial contract and loan agreement |
| Typical size | Smaller deals | Larger deals and projects |
Supplier credit is simpler and faster to arrange, and suits smaller transactions. Buyer credit takes the loan off the exporter's books entirely and suits large contracts, where the size of the exposure would strain the exporter.
Risks and regional usage
Until refinanced, the exporter carries the buyer's credit risk, transfer risk and foreign exchange risk if the credit is in the buyer's currency, and its days sales outstanding (DSO) rises. Recourse refinancing leaves these risks in place. There is also a pricing risk: an exporter that quotes a price including interest before it has a firm refinancing commitment may find that rates or the buyer's country rating have moved by the time it ships, so that selling the instruments costs more than it built into the price. Exporters therefore try to obtain a forfaiting or bank commitment, and the insurer's approval, before they sign the sales contract.
In India, "supplier's credit" is also a regulatory term seen from the importer's side: credit extended by an overseas supplier to an Indian importer, which the Reserve Bank of India treats as a trade credit under its rules on external commercial borrowings and trade credits, alongside buyer's credit. Under those rules, the purpose, maturity and cost of such credits are limited, and banks report them to the central bank.