Vendor credit is when a seller extends credit to a buyer, allowing them to receive products now and pay later. This model is used in various settings, including import/export, and can be structured to require upfront payment and a promissory note for the remainder. Both parties benefit, but finance charges are applied to the outstanding balance.
Vendor credit is an offer of credit that a seller or vendor extends to a buyer. This model is often used in a number of settings, including the import/export business, as well as supplying goods and services to companies of all sizes. Credit of this type allows the buyer to receive the necessary products now, paying for them later in accordance with 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 goods extends credit to the entity that buys them, with the plan of offering them for sale at a profit. The supplier may issue a line of credit to the importer, assuming the customer can demonstrate to the supplier that the importer is creditworthy.
In many cases, this supplier line of credit can be structured to require 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 can 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 the imported goods will be sold at a profit, allowing the transaction to proceed 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 provider and the customer. For the customer, establishing a line of credit means that it is possible to order what is needed now and pay for it gradually while earning a return for the use of the items ordered. For the provider, extending the line of credit means that constant streams of income are created, assuming that all customers who are extended provider credit make timely payments on their outstanding balances.
Like most types of credit situations, vendor credit is generally provided with the provision that finance charges will be applied to the outstanding balance on the customer’s credit account. The amount of interest charged is normally determined based on government regulations that apply in the jurisdictions involved, thus ensuring that customers are not charged 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 another source of credit were used to service the purchase.
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