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 bank. Importer's bank or Buyers Credit Consultant or importer arranges buyer's credit from international branches of a domestic bank or international banks in foreign countries. For this service, importer's bank or buyer's credit consultant charges a fee called an arrangement fee.
Buyer's credit helps local importers gain 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, buyer's credit can be availed for one year in case the import is for trade-able goods and for three years if the import is for capital goods. Every six months, the interest on buyer's credit may get reset.
Benefits to importer
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.
Steps involved
The customer will import the goods either under LC, collections or open account
The customer requests the Buyer's Credit Arranger before the due date of the bill to avail buyers credit financing
Arrange to request overseas bank branches to provide a buyer's credit offer letter in the name of the importer. Best rate of interest is quoted to the importer
Overseas bank to fund Importer's bank Nostro account for the required amount
Importer's 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)
Importer's bank will recover the required amount from the importer and remit the same to overseas bank on due date.
Cost involved
Interest cost: This is charged by overseas bank as a financing cost
Letter of Comfort / Undertaking: Your existing bank would charge this cost for issuing letter of comfort / Undertaking
Forward Booking Cost / Hedging cost
Arrangement fee: Charged by person who is arranging buyer's credit for buyer.
Risk premium: Depending on the risk perceived on the transaction.
Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges.
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 buyer's credit through their offshore offices.
