How to buy chemicals on CREDIT or How to avail Finance for Chemical Trade?
25/10/2024 10:10 PMPost by Sunita Kumari
Buying chemicals or any commodity on CREDIT has various levels of financial risks.
Locally in the Middle East or other market, local companies offer 1-3 months OPEN credit to their trusted buyers.
However, when it comes to international trade, it's difficult to offer material to someone on credit when the material will be shipped to another country.
That's the reason chemical suppliers generally use standard payment terms such as 100% LC (from nationalized banks) or 100% advance or 30-70 advance & on BL etc.
The safest payment for the supplier is 100% advance.
However this is the most unsafest mode of payment for buyers, if the supplier is the first time supplier for that buyer.
In this situation, can a financial entity come in-between and offer credit to chemical buyers or suppliers in export deals?
For example,if the buyer is Kuwait and the supplier is in India and there is a financial entity in Dubai.
There can be three possible options”
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Financial entity lend funds to the buyer and he pays to the supplier and returns funds with interest after consuming or forward sale of his material.
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Financial entity lends funds to the supplier and he supplies material to the buyer on credit and once he receives his payment from the buyer, he pays back to the financial entity.
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Financial entity buy from the supplier and then put his ad on margin and sells it to the buyer.
Option 1 & 2 have their own risk, as suppliers or buyers can be from any countries like India, China, Turkey or others where it's difficult to recover payment if things go wrong.
Option 3 is the safest if the buyer is confirmed with order.
But challenge with option 3 is that if a financial entity adds its own add up then the selling price will not be competitive and that results in the buyer to not accept the price.
Lets understand this equation among financial entities, buyer and seller with an example.
Say the buyer is Kuwait and the seller is in India and the financial entity is in Dubai. Now buyers want to buy the product with a deal value of 1M USD and the seller barely makes a 10% margin on this sale.
Now, if a financial entity convinces the supplier to drop down his margin 2.5% on condition that he will upfront money and more deals.
Financial entity then can use this 2.5% to sell to the buyer by giving him an additional 0.5% reduction cost plus 2% he keeps for his translation and using funds.
Can this be a feasible deal to satisfy the interest of each of three parties involved ?