Supplier Credit

The traditional and most straightforward model for an export credit facility is the supplier credit.  The main features of the facility are described below.

Under a supplier credit facility, the NZ exporter grants credit to its international buyer as part of its supply agreement. The New Zealand Export Credit Office (NZECO) provides the exporter with insurance covering the risk of default on repayment of the credit.

A supplier credit is summarised in the diagram below:

As with all export credit arrangements, the NZECO shares a degree of the risk with the insured (in this case, the exporter).  The NZECO can insure up to 90% for commercial risk cover and up to 95% for political risk cover.

For example, consider that the exporter’s supply contract provides a two-year supplier credit facility for a $1 million contract.  Under this arrangement, the foreign buyer pays the exporter a 15% deposit ($150,000) upfront, followed by four equal repayments of $212,500 in six-monthly intervals.  If the NZECO insures 95% political risk and 90% commercial risk cover, then the maximum contingent liability of the exporter will be $85,000 (10% of the $850,000 credit).  The exporter’s contingent liability will reduce proportionately after each repayment e.g. it will drop to $63,750 after the first repayment (10% of the outstanding $637,500 credit).

Accordingly, the exporter requires a strong balance sheet, and it is not usual to use supplier credits for very large transactions or complex projects.

Often the exporter may use their export credit insurance as a security to obtain finance from a bank.  The exporter normally assigns to the financing bank the insurance policy or the right to claim payments under the policy (in this case, the supplier credit is converted to a financing guarantee).  In return, the bank will provide a discounted payment of the outstanding export credit amount. 

This is summarised in the diagram below: