Navigating Systems Export: Payment Terms, Risks, and the Role of Supplier Credit

The export of industrial plants and complex systems presents unique challenges. These transactions often involve multi-year orders, lengthy production cycles, and substantial investments from buyers. Whereas demand in high-growth markets like Latin America, Asia, and the Middle East is strong, access to local credit can be limited, characterized by high interest rates and restricted availability of medium- to long-term financing. Italian companies, and exporters globally, must therefore strike a delicate balance between offering the deferred payment terms customers require, protecting themselves from non-payment risks, and preserving their own liquidity and investment capacity.

The Complexities of International Trade Finance

Operating in international markets introduces a range of risks beyond standard commercial concerns. Political instability, regulatory changes, and intense competition can all jeopardize even well-structured export operations. Common operational risks include customer insolvency, breach of contract, disputes over supply, and documentary issues that delay payment. Political risks, such as payment moratoriums, currency controls, and internal conflicts, can further impede the transfer of funds, even when dealing with creditworthy buyers. Strict adherence to local legal standards regarding bills of exchange – including format, signatures, and payment domiciliation – is too crucial to ensure the enforceability of credit and the effectiveness of guarantees.

Why Buyers Demand Deferred Payments

In key international markets such as Mexico, India, China, and Türkiye, access to affordable local credit is often a significant constraint for companies undertaking large capital investments. Buyers frequently request extended financial terms, allowing them to spread the cost of significant purchases over multiple years. In this environment, competitiveness hinges not only on product quality and price but also on the exporter’s ability to provide structured and sustainable payment solutions backed by appropriate financial instruments.

Understanding Supplier Credit

Supplier credit, also known as vendor financing, is a form of export financing where the exporting company extends a medium- to long-term loan to the foreign buyer – typically ranging from 2 to 5 years – to finance the purchase of capital goods, plants, machinery, or related services. This is more than a simple installment plan. it’s a structured transaction integrating banking, insurance, and often, public subsidies. The exporter establishes an installment payment schedule, and the buyer commits to repaying the amount plus agreed-upon interest.

Supplier credit is particularly well-suited for business-to-business (B2B) transactions common in sectors like industrial machinery, plant engineering, energy, and production technologies. In these cases, the ability to offer extended payment terms can be a decisive factor in securing a contract.

How Supplier Credit Works: A Step-by-Step Process

The supplier credit mechanism involves a coordinated effort between the exporting company, a bank, and a guarantee system. Here’s a breakdown of the process:

1. Supply Contract & Bills of Exchange: The exporter and buyer establish a supply contract outlining a partial advance payment (minimum 15%) and a deferred payment component. The deferred credit is formalized through international bills of exchange, such as promissory notes or drafts, representing the buyer’s payment commitment. Increasingly, credit representation is shifting towards invoices, eliminating the need for bills of exchange.
2. Guarantee/Insurance: The operation is secured by a guarantee, typically insurance coverage issued by an export credit agency like SACE in Italy, protecting against both political and commercial risks. Corporate, bank, or private insurance guarantees are also viable alternatives.
3. Bank Discounting: The exporter’s bank provides non-recourse discounting of the credit. This means the bank advances the exporter the amount of the deferred credit (less discount interest and commissions), assuming ownership of the credit without recourse to the exporter. The exporter transfers ownership of the guarantee to the bank, allowing the bank to activate it in case of non-payment.
4. Public Contribution (SIMEST): In many cases, SIMEST, the Italian agency for the support of foreign investment, provides a public contribution to reduce the cost of the discount interest applied by the bank. This allows the exporter to offer more competitive financial terms to the buyer.

In 2024, SIMEST completed 170 operations totaling €525 million, a 5% increase compared to 2023, reaching a new all-time high. Notably, approximately 60% of the companies utilizing supplier credit through SIMEST in 2024 were first-time users, indicating growing adoption among small and medium-sized enterprises (SMEs).

Benefits of Supplier Credit for Exporters and Importers

Supplier credit offers significant advantages for both exporters and importers:

• For the Exporter: Immediate collection of the entire supply value through non-recourse discounting, preserving capital and borrowing capacity. Risk transfer to banking and insurance entities, enabling operations in complex markets with greater confidence.
• For the Importer: Access to structured financing with potentially more favorable conditions than local market options, often enhanced by public contributions. The ability to align repayment schedules with cash flows generated by the investment. Avoidance of utilizing or requesting credit lines from local banks.

The strength of supplier credit lies in its ability to create a mutually beneficial arrangement, making the investment sustainable for the importer and the operation secure for the exporter.