Buyer's credit is a type of loan extended to an overseas buyer by an intermediate financial institution to finance the purchase of goods or services from the exporter's country. It provides financing to the importer to pay the exporter and helps the importer manage cash flow and currency risks. The loan is typically repaid by the importer to the financial institution after an agreed period of time.
The loan is typically secured through a Letter of Credit (LC) issued by the importer's bank, which acts as a guarantee of payment to the foreign supplier. The loan period is usually between 90 and 180 days, after which the importer must repay the loan to the overseas bank. A Letter of Credit (LC) is a type of financial guarantee used in international trade transactions around the world. It's a commitment by a bank, on behalf of a buyer (also known as the importer), to pay the seller (also known as the exporter) a specified amount of money in case when certain conditions are met. The purpose of an LC is to provide assurance to the seller that they will receive payment for the goods or services they are providing to the buyer, even if the buyer is unable to pay for the goods themselves. This helps to mitigate the risk of non-payment for the seller and allows them to complete the transaction and deal with confidence.
An LC typically contains the following information:
The name of the buyer and the seller involved in the transaction
The amount of money that the bank is committing to pay the seller
The conditions that must be met in order for the bank to make the payment to the seller
The expiration date of the LC, which is the last date that the seller can present the required documents to the bank in order to obtain the payment
When the LC is issued, the seller ships the goods to the buyer and provides the necessary shipping documents to the bank. The bank then verifies that the conditions of the given LC have been met and, if everything is in order, releases the payment to the seller. Back-to-Back (B2B) is a popular method of financing used in the business world to enable companies to fulfill their obligations in a trade transaction and is widely used in the global financial industry. It's a method of financing that enables two companies to complete their transactions without the need for direct financing from a financial institution or organization.
The process works as follows: Company A has a contract to sell goods or services to Company B. However, Company A needs financing to pay for the goods or services they are purchasing from their own supplier. Instead of obtaining a loan directly from a financial institution, Company A approaches Company B and asks them to finance the transaction by issuing a Letter of Credit (LC) in favor of Company A's supplier. In this scenario, Company B acts as the intermediary, issuing an LC to Company A's supplier on behalf of Company A. Company B then takes possession of the goods or services and resells them to Company A for a profit. This way, Company A obtains the financing they need without having to go directly to a financial institution, and Company B earns a profit from the difference between the price they paid for the goods or services and the price they charge from Company A.
B2B financing can be used in a variety of situations, such as when a company needs to purchase goods from a supplier but does not have the funds to do so, or when a company needs to obtain financing in a foreign currency that is not available in their own country of operation. By using B2B financing, companies are able to access the financing they need to complete their transactions, without having to go through the traditional lending processes that can get fairly complicated.
Buyer's credit is a financial tool that allows a buyer to obtain financing from a financial institution or a bank to purchase goods or services from a seller. The buyer uses the credit to pay the seller, and then repays the credit in installments, such as the BNPL model, over a specified period of time, including interest and commissions. Such financial relationships can occur on both B2B and B2C scales. Here's how the process works:
The buyer identifies a need for financing to purchase goods or services.
The buyer applies for buyer's credit from a financial institution or a bank.
The financial institution or the bank evaluates the buyer's creditworthiness and decides whether to grant the credit to the requesting side.
If approved, the financial institution or the bank issues a letter of credit in favor of the seller.
The seller delivers the goods or services to the buyer and submits the letter of credit to the financial institution or the bank for payment.
The financial institution or the bank pays the seller, and the buyer repays the credit in installments over a dedicated period of time.
It's important to note that buyer's credit can be used for both domestic and international transactions and can be denominated in different currencies. The terms and conditions of the credit, such as repayment period and interest rate, are agreed upon between the buyer, the financial institution or the bank, and the seller. From a business perspective, buyer's credit can be a valuable tool for companies looking to grow and expand their operations. By offering the option of financing to their customers, businesses can increase sales and strengthen their customer relationships. In particular, buyer's credit can be a game-changer in the B2B landscape where larger transactions and extended payment terms are the norm.
In B2B markets, buyer's credit can help to build partnerships between companies by enabling one company to provide financing to another. This can be especially useful for companies looking to enter new markets or purchase large amounts of goods or services according to their needs. By offering financing, a business can increase its competitiveness and provide a valuable service to its customers. One of the benefits of utilizing buyer's credit is the ability for businesses to form strategic partnerships. By offering financing solutions, a company can provide valuable support to its partners and help them to reach their goals. This, in turn, can lead to stronger partnerships and long-term business relationships with other companies, enhancing overall growth and development.
For businesses, using buyer's credit can be a good way to grow and improve their operations. It's especially helpful in the B2B market where companies often buy and sell bigger products and take longer to pay.
Furthermore, buyer's credit can also provide a source of revenue for businesses, particularly those operating on a B2B level. Companies can earn fees by offering financing to their customers, which can help to offset the costs of operating and growing their business. Offering financing solutions to customers can be an excellent way for businesses to increase sales and establish strong relationships. It can also provide a competitive edge, particularly in the B2B market where a financing option can be a key factor in securing an important deal, sale or contract. By leveraging the power of buyer's credit, companies can drive growth and success in the long-term.
Key terms: back-to-back and LC
Number one piece of advice for companies who are looking to export: knowing your market, the type of buyer you are selling to, i.e whether they are end-users, consumers or industrials and getting to know all about your buyer and their culture
Gabriel Ojeda, President of Fitz-Pak Corporation and an EXIM Bank advisory board member
Many international companies consider the Indian market one of the most promising in the world, and are seeking to enter it as early as possible. Some firms here are achieving successes that are unimaginable in other emerging markets. India has the third highest number of unicorn companies and total number of startups after China and the United States. This data closely relates to the key features of buyer’s credit that are present on the Indian market.
The Indian financial industry that serves businesses is growing and offers many different financial products and services to meet the needs of companies. This industry consists of banks, non-banking financial companies (NBFCs), and other financial institutions that specialize in providing credit and financing to businesses of all sizes.
Businesses in India can choose from a vast array of financial options, including trade finance, term loans, working capital loans, equipment financing, as well as the option to pay in installments. With the rise of digital platforms and fintech firms, accessing these financial products and services has become easier and more efficient for companies that work on a B2B level. The use of technology and data is becoming more common in the Indian B2B financial industry. This has accelerated the distribution of credit and loans. In addition to regular loans, the Indian financial industry is also offering new types of financing options like supply chain financing and invoice financing. This helps businesses manage their money better and make sure they have enough to run their operations.
Buyer's Credit is a financing solution made available to Indian importers to help cover the costs of their purchases from foreign suppliers. This type of loan is extended by an overseas bank and is designed to provide Indian importers with access to financing that can be used to pay for imported goods and services.
The process of accessing Buyer's Credit in India usually involves the following steps:
The Indian importer contacts an overseas bank to express their interest in obtaining Buyer's Credit financing.
The overseas bank performs a credit assessment of the importer to determine their eligibility for the loan.
If approved, the overseas bank provides the financing to the importer. After that they can use the funds to pay the foreign supplier for the imported goods or services.
The importer's bank issues an LC in favor of the foreign supplier, providing a guarantee of payment for the imported goods or services.
The foreign supplier ships the goods and presents the necessary shipping documents to the importer's bank.
The importer's bank verifies the documents and, if everything is in order and up to date, releases the payment to the foreign supplier.
After the agreed loan period, the importer must repay the loan amount to the overseas bank according to the pre-defined terms.
As companies in the B2B industry in India look to expand and grow, they often require financial assistance to help achieve their goals. Fortunately, there are a variety of financing options available in the Indian market to help businesses access the capital they need. We will go into more detail about five main financing options for businesses in India. Each of these financing options provides unique benefits that can help businesses manage their finances:
1. Trade finance. Trade finance refers to the financing of international trade transactions, which enables businesses to import and export goods and services across the borders. Trade financing is a crucial component of the business environment in the Indian market, particularly for B2B transactions.
Businesses in India have access to a range of funding options when it comes to trade finance. These choices range from conventional bank loans to cutting-edge supply chain financing, invoice discounting, and factoring trade finance options.
Reduced risk connected with overseas transactions is one of the main advantages of trade finance for Indian enterprises. Businesses face a variety of risks when interacting with overseas counterparts, including currency fluctuations, political unpredictability, and trade obstacles. From a B2B perspective, trade finance is crucial for building and maintaining successful business relationships. This is significant for companies whose prosperity depends on trading with other countries.
2. Term loans. In the Indian market, term loans are a common source of funding for enterprises. A term loan is paid back over a predetermined time period, usually between one and ten years. Businesses frequently utilize this type of finance to pay for long-term expenditures like the purchase of machinery, property, or other fixed assets.
From a B2B perspective, term loans can be an excellent option for businesses looking to fund long-term investments. These loans give companies the option to spread out loan repayment over a longer period of time, which can lessen the financial impact on the company’s budget. Furthermore, term loans frequently have fixed interest rates, which can give firms assurance regarding their debt repayment commitments.
The fact that term loans in the Indian market can be utilized to fund a variety of investments is one of their main advantages. This involves making investments in new machinery or technological advancements, financing corporate expansion, and buying land and buildings.
3. Working capital loans. Working capital loans are a popular financing option for businesses in the Indian market. These loans are intended to offer quick funding for ongoing costs including payroll, inventories, and accounts payable.
Working capital loans are a crucial component of a company's financial strategy from a B2B viewpoint. These loans give companies the money they need to handle their cash flow and take care of their operating requirements. Working capital loans can give businesses the money they need to maintain their operations, whether it be to pay suppliers or cover unforeseen costs.
Short turnaround time is one of its main advantages. These loans are created to give businesses quick access to capital, which can be crucial for those needing cash to embrace new opportunities.
Moreover, with the rise of digital lending platforms in India, businesses can now easily apply for and receive working capital loans online, making the application process more convenient and accessible to companies across the country.
4. Equipment financing. For businesses in India wishing to purchase or upgrade the gear and equipment essential for their work processes, equipment finance becomes a suitable option. This kind of financing is made to assist businesses in acquiring the equipment needed to conduct their operations successfully and gives firms the finances they need to purchase equipment without having to make a sizable upfront payment.
In the Indian market, payback terms and interest rates for equipment financing might change depending on the lender and the borrower's creditworthiness. One to seven years are typical repayment lengths, while interest rates might be fixed or variable.
The ability for businesses to stay up with technological changes and boost efficiency is one of the main advantages of equipment financing. This is especially crucial in the current business climate, when organizations need to stay relevant with the most advanced tools and machines in order to be competitive.
Furthermore, as interest paid on loans is typically tax deductible, firms may find equipment financing to be a tax-efficient choice.
5. Payment in installments. A well-liked financing choice in the Indian market that enables businesses to stretch the expense of their purchases over time is the option to pay in installments.
Businesses who wish to make a sizable purchase but lack the cash to make a one-time payment as well as companies that must make urgent purchases or expenditures that are necessary to their operations can benefit greatly from this form of financing.
Key features of buyer’s credit in the Indian market
Want to know more about BNPL platform for b2b by Penenza for installment purchases?
The competitive power of suppliers is reduced when large quantities of substitute goods appear on the market, and switching to them does not seem difficult or costly. That is relevant on a B2B market, as good terms may offer a long term partnership. On the other hand, if switching to a competitor is easy, it might be the case which a supplier would not want to happen.
The competitive power of suppliers increases if they can provide component parts at lower prices than if they produce them themselves. The influence of suppliers is great as long as the number of components does not increase enough to create backward integration.
When evaluating a supplier's bargaining power, there are four main criteria to consider.
Number of suppliers compared to buyers
How dependent the buyer is on the supplier's sales
The switching costs of suppliers
Availability of suppliers for immediate purchase
Here is a list of factors that suggest a strong supplier power in business:
The cost of switching for buyers is high
There are fewer suppliers than buyers
Low dependence of supplier sales on buyers
Supplier switching cost is low
Substitutes are not available
Buyers rely heavily on sales from suppliers
And this factors would hint that the power of a supplier is rather weak:
The cost of switching for customers is low
Suppliers are larger compared to buyers
High dependence of supplier sales on buyers
Supplier switching costs are high
Substitutes are available
Buyers are not highly dependent on supplier sales
In B2B relationships, the power dynamics between suppliers and buyers can greatly impact the success and profitability of the buying firm. Suppliers with a strong bargaining position hold a significant amount of influence over the prices, quality, and delivery of the goods or services they provide for their customers. This power dynamic can be shaped by a complex interplay of variables, such as:
Control over key inputs or resources: If a supplier controls a critical resource or input that is essential for the production process of the buying firm, it can give them greater bargaining power.
Lack of substitute products: When there are limited alternatives for a particular product or service, the supplier has a stronger bargaining position.
Large supplier size and market concentration: A supplier with a dominant market share can exert more power in negotiations due to their size and bargaining leverage.
Strong brand reputation: A supplier with a well-established brand and reputation can leverage this to increase their bargaining power.
Dependence of buyers on the supplier: If the buying firm is heavily dependent on the supplier for its operations, the supplier can use this to negotiate better terms.
When suppliers hold too much power in a B2B relationship, it can result in higher costs for the buying firm and reduced negotiating leverage. On the other hand, a well-negotiated relationship with a supplier can bring stability, better pricing, and improved product offerings to the B2B partnership. It’s important for buying firms to carefully evaluate and manage their relationships with suppliers to ensure that they are operating in a balanced and mutually beneficial partnership. By doing so, they can improve their bargaining position, secure better terms, and achieve long-term success and growth in their B2B collaborations.
What is the power of suppliers in business?
In the B2B setting, suppliers can bring significant advantages to the table and enhance a company's performance that would propel it towards prosperity. Here are several ways in which suppliers can have a positive impact on a business:
Quality Assurance: Collaborating with trustworthy suppliers that prioritize quality and consistency can bring a heightened level of dependability to a business's offerings. This can result in elevated customer satisfaction, improved brand recognition, and decreased warranty costs.
Economical Benefits: By forging partnerships with suppliers that offer advantageous pricing, a business can reduce its expenses, freeing up resources to be allocated towards other areas of the company.
Progressive Thinking: Suppliers can act as a valuable source of cutting-edge ideas, novel products, and state-of-the-art technologies. They can help a business remain ahead of the curve and preserve its relevance in the industry.
Streamlined Operations: Efficient suppliers can optimize the supply chain and hasten delivery times, leading to improved productivity and reduced waste of valuable resources.
On-time Delivery: Working with dependable suppliers can guarantee that deliveries are executed promptly and with precision, enabling a business to reach its customers more swiftly and generate revenue faster.
Strong relationships: Building strong relationships with suppliers can lead to better communication and problem-solving.
Minimized Risk: By diversifying its supplier base, a business can reduce its risk exposure, safeguarding itself from supplier disruptions or failures. This can foster stability and help it attain long-term success and growth, which is crucial on a B2B scale.
What is the positive impact of suppliers?
In general, a supplier's capabilities are evaluated by summing up the indicators of quality, price, timeliness of delivery and service.
The following method is based on the study of the characteristics that reflect the benefits of supplier management.
A sample list of characteristics includes the following:
Organization: expansion of product markets; building a circle of loyal customers; ensuring environmental safety; resource conservation in production and disposal; protection of intellectual property and business security; compliance with contracts, agreements, just-in-time delivery schedules.
Partnership: corporate supply chains; openness to the society; activation of external relations; support of social programs; active participation in associations, holdings, councils; cooperation with other suppliers.
Prospects: leading role in the industry; mastering of new technologies; introduction of information technologies; use of modern methods of marketing, financial management; delivery of new products to the market; preparation of elements of the logistics system of commodity circulation; improvement of the organizational structure of the enterprise.
Understanding by the supplier of the role of product quality assurance and its link in the supply chain and assuming responsibility;
The supplier takes effective corrective action as requested by the customer with respect to its management system or product quality;
Receiving consistent feedback from the customer's management system from the supplier.
What profits supplier management can give your business?
The BNPL method of dealing with suppliers in B2B scenarios brings many perks to companies who choose to implement it into their strategic work processes.
Cash Conservation: By allowing companies to delay payment until a later date, BNPL conserves cash flow and frees up resources to be allocated to other important business operations.
Elevated Purchasing Potential: With the BNPL option, companies can purchase more goods and services without the immediate need for full payment, thus increasing their purchasing power.
Strengthened Supplier Partnerships: BNPL establishes trust and good faith in payment practices, leading to stronger relationships with suppliers. These are essential for long term success.
Adaptable Budgeting: BNPL aligns expenses with cash flow and provides businesses with more control over their budgets, fostering greater financial flexibility.
Business Expansion Opportunities: BNPL enables businesses to take advantage of new prospects and ventures, such as product launches, marketing campaigns or special promotions, that may require substantial upfront investment.
Efficient Record Keeping: BNPL simplifies the tracking of payments and expenses, making the record keeping process a more organized and accurate activity.
Reduced Financial Risk: By spreading payments over time, BNPL reduces financial risk for B2B companies, particularly those with limited cash reserves.
In conclusion, the BNPL approach is a highly valuable tool for businesses seeking to optimize their supplier management systems. With its numerous benefits BNPL has the potential to revolutionize the way companies approach supplier management in the B2B market. Platforms like Penenza provide an easy-to-use way to explore BNPL for B2B-oriented customers and help to elevate companies' payment processes through comfortable terms.