International trade credit is a situation in which a seller is willing to extend some type of credit terms to an international buyer, rather than requiring up front payment in cash before the order is processed. This type of arrangement has become more common in recent decades, as buyers participate in an international market, securing goods and services that are produced outside a domestic setting. The terms of the international trade credit will vary, with some credit accounts structured to allow up to 90 days for full payment to be received, while others call for making at least minimum payments on the credit account until the balance is retired in full.
One of the benefits of international trade credit is that the seller provides the financing for the orders placed by buyers, rather than those buyers having to secure financing from a third party. This can often mean fewer delays in processing orders and arranging shipments, since there is no need to wait for the receipt of a letter of credit or other financial document from the buyer’s bank. If the idea is for the buyer to receive the goods and offer them for sale to his or her customers as soon as possible, the time saved can make the difference from being able to move the goods at the best possible prices, or having to settle for lower returns due to missing the peak of demand for the goods.
The seller also can benefit from the extension of international trade credit. Most credit accounts of this type do include the ability to assess some sort of interest or fees in return for establishing a credit limit and allowing the client to pay the balance over time. When the financing is short-term, such as calling for full payment within 90 days of purchase, the seller may structure the account to asses no interest for the first 45 days but then begin to apply a fixed or floating rate of interest to any balance that remains during the 45-90 day period. This arrangement allows the seller to earn additional funds from the transaction if the buyer takes the full 90 days to pay, but also creates a situation in which the payment may be tendered sooner or later if the buyer wishes to avoid paying interest on the balance.
The decision to extend international trade credit is usually based on the perception of the seller of the credit worthiness of the buyer. To that end, the seller will often conduct a background check that includes careful scrutiny of the information found on the buyer’s credit reports, as well as any other public data that relates to the reputation of that buyer. This helps to protect the seller, as finding sufficient negative information may serve as a warning that extending the international trade credit would present too great a risk in comparison to the rewards. When the trade credit involves some sort of revolving credit account, the background investigation can also be very helpful in setting credit limits that help to minimize the liability assumed by the seller.
