How to take advantage of the supplier’s credit scheme through the use of a usance letter of credit?

How to take advantage of the supplier’s credit scheme through the use of a usance letter of credit?

National Bank of Ethiopia has recently revised the external loan and supplier’s credit directive in order to make the LGB Gas import and agriculture sectors also benefit from the scheme. In today’s global economy, it’s more important than ever for businesses to be able to take advantage of every opportunity to save money and expand their businesses. And, this scheme can also be considered as an interesting opportunity to do that for businesses operating in these sectors. In relation to it, banks are also allowed to open a Usance Letter of Credit for an exporter who wants to import equipment, raw materials, machineries and accessories for his/her export business against future export proceed using supplier’s credit or external loans with a minimum of one year repayment period. In this blog, we will look at what Supplier’s Credit and Usance Letter of Credit are and how Supplier’s Credit scheme is processed through the use of the Usance Letter of Credit.

What is Supplier’s Credit?

Supplier’s Credit simply refers to a loan that can be availed by exporter where the importer is expected to pay after the loan period as agreed in the LC terms or loan agreement. Supplier’s Credit is a type of short term loan that is collateralized by a letter of credit and typically used to finance the purchase of inventory, raw materials, equipment, machinery or any other asset that is necessary for the operation of a business. In addition, it can also be used to finance the working capital needs of a business.

What is a Usance Letter of Credit?

A usance or a deferred letter of credit (L/C) is a type of letter of credit that is payable after a certain period of time has passed (usually after 180 days). Unlike a standard letter of credit, which requires immediate payment, in most cases ‘sight payment’, a usance letter of credit allows businesses to delay payment for a specified period of time. This can be beneficial for businesses in these sectors that need to purchase raw materials, machineries or other supplies on credit and then sell their products before they are able to pay their debt.  In addition, it helps businesses to improve their cash flow. And, this type of letter of credit can be used in our country for imports using the supplier’s credit and external loan scheme arranged by the National bank of Ethiopia.

Usance letters of credit are beneficial for both buyers and sellers. For buyers, they provide protection against non-delivery of goods or services. For sellers, they provide assurance that payment will be received within a specified timeframe. In addition, usance letters of credit can be used to take advantage of early payment discounts offered by suppliers. These discounts can result in significant savings for a business.

How it works?

In order for the transaction to take place, the following ten steps must occur: however the sequence might overlap or come one after the other, conditioned on the cases.

Step 1 – The buyer shall first get approval in the form of an approval letter and registration from the National Bank of Ethiopia

Step 2 -The buyer and seller enter into a contract and agree on terms including price, time of payment, quality, quantity, and delivery date.  The agreement may also state that payment be made on the basis of  Letter of Credit.

Step 3 – Buyer approaches his/her Bank for supplier’s credit process and issuance of usance Letter of Credit in favor of the seller

Step 4 – The buyer’s Bank will prepare a credit analysis and evaluate the business performance and cash flow position that the buyer or the business will have at the time of the loan or l/c settlement. And, the credit request will normally be approved with the recommendation of issuance or opening of the usance letter of credit with zero margins. In general, at this point the local bank process the client’s request as per NBE directives and its internal policies and procedures, associated with the service requested.

Step 5 – Advising bank advises the usance Letter of Credit to the seller.

Step 6 – Upon receipt of the Letter of Credit, the seller prepares shipment and delivers documents to the seller’s bank

Step 7 – Presenting or seller’s bank post checking documents for discrepancies (As per UCP 600) dispatches the document to buyer’s bank for acceptance.

Step 8 – Buyer pays the document amount to issuing Bank at the agreed-upon time. However, the issuing Bank forwards the documents to the buyer immediately without collecting the Letter of Credit or Supplier’s Credit amount.

Step 9- The buyer can now use the documents to obtain the goods.

Step 10- On maturity, the Importer makes the payment in birr to his bank and the buyer’s bank makes payment to the Supplier’s Credit Bank in foreign currency.

In conclusion, the buyer’s related service requests or applications will be treated as per NBE directives as well as internal credit and trade finance policies and procedures of the local banks depending on the cases.


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