What Is Buyer's Credit?
Buyer's credit is a short-term loan facility extended to an importer by an overseas lender, for example, a bank or financial institution to finance the purchase of capital goods, services, and other big-ticket things. The importer, to whom the loan is issued, is the buyer of goods, while the exporter is the seller. Buyer's credit is an extremely valuable financing method in international trade as it gives importers access to less expensive funds compared to what might be accessible locally.
Figuring out Buyer's Credit
A buyer's credit facility includes a bank that stretches out credit to an importer of goods, as well as an export finance agency situated in the exporter's country that guarantees the loan. Since buyer's credit includes various gatherings and cross-border legalities, it is generally just accessible for large export orders with a base threshold of a couple million dollars.
The availability of buyer's credit likewise makes it workable for the seller to seek after and execute large export orders. The importer gets the flexibility to pay for the purchase throughout some undefined time frame as stipulated in the terms of the credit facility. The importer can likewise request funding in a major currency that is more stable than the domestic currency, particularly in the event that the last option has a huge risk of devaluation.
The export finance agency's inclusion is critical to the outcome of the buyer's credit mechanism. That is on the grounds that its guarantee safeguards the financial institution making the loan from the risk of non-payment by the buyer.
The export finance agency likewise gives coverage to the lending bank from other political, economic, and commercial risks. In return for this guarantee and risk coverage, the export agency charges a fee that is paid for by the importer. Costs associated with buyer's credit incorporate interest and arrangement fees on the loan.
Buyer's credits are frequently mistaken for letters of credit; nonetheless, they are various products. A buyer's credit is a loan facility though a letter of credit is a commitment by a bank to a seller that payment will be received on time, and in the event that the buyer can't pay, the bank will be responsible for the whole amount of the purchase.
Buyer's Credit Process
There are several means associated with the buyer's credit interaction. The exporter initial goes into a commercial contract with a foreign buyer or importer. The contract indicates the goods or services supplied alongside prices, payment terms, and so forth.
The buyer then gets credit from a financial institution for the purchase. A export credit agency situated in the exporter's country gives a guarantee to the lending bank to cover the risk of default by the buyer.
When the exporter delivers the goods, the lending bank pays the exporter as per the contract terms. The buyer makes principal and interest payments to the lending bank as per the loan agreement until the loan is repaid in full.
Benefits of Buyer's Credit
Buyer's credit benefits both the seller and the buyer in a trade transaction. As referenced above, borrowing rates are generally less expensive than what an importer might find with domestic lenders. The rates are commonly founded on London Interbank Offered Rate (LIBOR); the point of reference for most short-term interest rates. The importer likewise gets an extended amount of time for repayments, instead of paying upfront immediately straightforwardly to the exporter.
Another benefit stretches out to the exporter. Payment is made on time on the due date or as indicated by the terms of the sales contract with the importer with practically no undue deferrals. The certainty of the hour of payment assists with overseeing loan receivables, which thus permits a financial institution to deal with its deposits and regulatory requirements.
- With buyer's credit, exporters are guaranteed payment(s) on the due date.
- Buyer's credit is a short-term loan to an importer by an overseas lender for the purchase of goods or services.
- In light of the complexity in question, buyer's credit is just made accessible for large orders with least monetary thresholds.
- An export finance agency guarantees the loan, alleviating the risk for the exporter.
- Buyer's credit permits the buyer, or the importer, to borrow at rates lower than what might be accessible domestically.
- Buyer's credit permits an exporter to execute large orders and permits the importer to get financing and flexibility to pay for large orders.