Supplier's Credit: Managing Payment Extensions for Raw Material Sourcing

Supplier's credit is a trade finance arrangement where an overseas vendor, or their bank, lets an Indian importer pay later, backed by a usance Letter of Credit. It frees up working capital without taking a domestic loan.

Picture a textile unit that imports fabric. The shipment lands, production starts, and finished goods sell within sixty days, but the overseas supplier wants to pay on day thirty. That month-long hole is where a lot of small importers bleed cash they do not have. Supplier's credit closes the hole by letting the payment date slide to match when the money actually comes in. And where domestic working capital is still needed around the import, a business loan from IIFL Finance can sit alongside the arrangement.

What Is Supplier's Credit?

It is a deferred payment arrangement on an import. The overseas vendor, or more often a bank in the vendor's country, extends credit to the Indian importer, usually backed by a usance Letter of Credit, an LC payable at a future date rather than on sight. The importer gets the goods now and pays at the end of the agreed term.

Supplier's Credit vs Buyer's Credit

People mix these two up constantly, so here is the clean split:

In short: the difference is who originates the credit. A raw material importer with a strong, willing supplier often finds supplier's credit simpler; one with a strong banking relationship may prefer buyer's credit.

How Supplier's Credit Works, Step by Step

1. Buyer and seller agree to deferred payment terms in the purchase contract.
2. The Indian importer opens a usance LC through their bank.
3. The overseas supplier ships the goods and presents documents to their bank.
4. The supplier's bank discounts the LC and pays the supplier upfront.
5. The supplier's bank now holds the deferred obligation.
6. On the due date, the importer's bank remits payment to the supplier's bank.
7. The importer repays their own bank.

The usance LC is the spine of the whole thing. It is the importer's bank promising to pay at a future date, which is what gives the supplier's bank the confidence to pay the supplier early.

What It Costs

Indicative ranges; actual rates vary by bank and by your credit profile.

Take a ₹50 lakh raw material import on a 180-day tenor. You would carry the LC issuance charge, roughly six months of SOFR-linked usance interest, and, if you hedge, a forward cover premium. Add those and compare the total against what a domestic working capital loan would cost over the same period. Often the import route comes in cheaper, but not always, so run your own numbers before committing.

One rate note worth knowing: the benchmark moved. Older guides still quote LIBOR, but SOFR replaced it as the reference rate for this kind of credit, so any cost worked out on a LIBOR basis is out of date.

RBI Rules You Need to Know

The RBI sets the boundaries through the Foreign Exchange Management (Borrowing and Lending) Regulations, as amended in February 2026, which now consolidate the trade-credit framework previously housed in the Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations. The headline limits: tenor up to 1 year for non-capital goods imports, and up to 3 years for capital goods, counted from the date of shipment. Where the credit is reportable, your Authorised Dealer (AD) bank files the trade credit reporting with the RBI. Non-reporting is not a small matter, it can create compliance problems down the line, so make sure your AD bank handles it.

Practical Use Cases

• Textile manufacturer: imports fabric on a 90-day deferral, freeing working capital through the production run.
• Auto-component maker: imports speciality steel on a 180-day tenor to line up payment with the production cycle.
• Pharma API importer: uses supplier's credit to avoid tying up cash while regulatory approvals run their course.

In each case the win is the same: cash that would have gone to the supplier on day thirty stays in the business for the length of the term.

Conclusion

For a raw material importer, supplier's credit is one of the cleanest ways to keep cash in the business: a healthier working capital cycle, a cost that can undercut a domestic working capital loan, and payment timing that lines up with receiving and processing the goods. The exporter gains too, payment guaranteed through the LC, and the ability to offer competitive terms to win the order.

The import leg rarely stands alone, though. Most MSME importers still have domestic working capital needs around it, and a business loan from IIFL Finance can cover those; for asset-holding businesses needing short-term cash quickly, a gold loan is another route. Both sit alongside the trade finance structure rather than replacing it, so run your numbers, confirm the tenor and reporting with your AD bank, and line up the balance funding before you commit.

Disclaimer : The information in this blog is for general purposes only and may change without notice. It does not constitute legal, tax, or financial advice. Readers should seek professional guidance and make decisions at their own discretion. IIFL Finance is not liable for any reliance on this content. Read more