Buyer’s credit is the credit availed by an Importer (Buyer) from overseas Lenders i.e. Banks and Financial Institutions for payment of his Imports on due date. The overseas Banks usually lend the Importer (Buyer) based on the Letter of credit (a Bank Guarantee) issued by the Importers (Buyer’s) Bank. In fact the Importers Bank brokers between the Importer and the Overseas lender for arranging buyers credit by issuing its Letter of Comfort for a fee. Buyers credit helps local importers access to cheaper foreign funds close to LIBOR rates as against local sources of funding which are costly compared to LIBOR rates.
Buyers Credit is a financial arrangement in which a bank or financial institution, or an export credit agency in the exporting country, extends a loan directly to a foreign buyer or to a bank in the importing country to pay for the purchase of goods and services from the exporting country. Also known as financial credit. This term does not refer to credit extended directly from the buyer to the seller (for example, through advance payment for goods and services).
Benefits of Buyers Credit: The benefits of buyers credit for the importer is as follows:
- The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows
- The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing.
- The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.
- The importer can use this financing for any form of trade viz. open account, collections, or LCs.
- The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency.
- Rate of interest is linked with LIBOR and the effective cost of finance is very less as compared to term loan in Indian currency or cash credit.
- Buyer avails the further credit in addition to letter of credit.
- Supplier of the goods received the payment as per LC payment terms.
- Buyer can also request for further roll over buyer’s credit.
Process Flow for Buyers Credit on Bank Lines:
The process flow for availing buyer’s credit:
1) The Indian customer will import the goods either under DC, Collections or open account
2) The Indian customer request Bank in India before the due date of the bill to avail buyers credit financing
3) Importer arranges to send a co-acceptance (indemnity) from his existing banker to Bank in India
4) Importer’s existing banker marks his import limits and sends the co-acceptance (indemnity) to Bank in India
5) Based on this Bank in India will arrange funding by sending a co-acceptance to the funding bank.
6) The funding bank will credit the importer’s bank Nostro account for the required amount.
7) Importer’s existing banker will retire the import bill by utilizing the amount credited.
8′) Bank in India to recover the principal and interest amount from the importer’s bank and remit the same to funding bank on due date.
The importer wanting to avail Buyer’s Credit from Bank in India should be an existing customer of the Bank holding a current account with them . Some banks offer this on transaction basis even without a current account.
The above are general guidelines , every Bank will have their own procedures and policies which might vary from Bank to Bank.