What is a Buyer's Credit?

      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 comfort (a Bank Guarantee) issued by the Importers (Buyer's) Bank. Importers Bank / Buyers Credit Consultant / Importer arranges buyers credit from international branches of a domestic Bank or international banks in foreign countries. For this services Importers Bank / Buyers credit consultant charges a fee called arrangement 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.

      The duration of Buyer's credit may vary from country to country, as per the local regulations. For example in India, Buyers credit can be availed for 1 year in case the Import is for trade-able goods and for 3 years if the Import is for Capital Goods. Every six months the interest on Buyers credit may get reset.

Benefits of Buyer's Credit to Importer

1. The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows
2. The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing.
3. The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.
4. The importer can use this financing for any form of trade viz. open account, collections, or LCs.
5. The currency of imports can be different from the funding currency, which enables importers to take a favorable view of a particular currency.

Steps involved in buyer's credit

1. The customer will import the goods either under DC, Collections or open account
2. The customer requests the Buyer's Credit Arranger before the due date of the bill to avail buyers credit financing
3. Arranger to request overseas bank branches to provide a buyers credit offer letter in the name of the importer. Best rate is quoted to importer
4. Overseas Bank to fund Importers nostro account for the required amount
5. Exporters bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment)
6. On due date existing bank to recover the principal and amount from the importer and remit the same to Overseas Bank on due date.

Cost Involved

1. Interest cost: This is charged by overseas bank as a financing cost
2. Letter of Comfort / Undertaking: Your existing bank would charges this cost for issuing letter of comfort / Undertaking
3. Forward Booking Cost / Hedging Cost
4. Arrangement fee: Charged by person who is arranging buyer's credit for you.
5. Risk Premium: Depending on the risk perceived on the transaction.
6. Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges.
7. WHT (Withholding Tax): The customer may have to pay WHT on the interest amount remitted overseas to the local tax authorities depending on local tax regulations. In case of India, the WHT is not applicable where Indian banks arrange for buyers credit through their offshore offices