Understand the Benefits of Buyer’s Credit
Buyer’s credit is a credit loan offered by the overseas lender that may be banks and other financial institution to a buyer (importer) for the goods they are importing. In other words, it means finance for imports payments arranged by the buyer (importer) from the overseas banks and financial institution. The overseas financial institution or banks usually lend money to the importer based on the letter of comfort issues by the bank of the importer.
Importance of buyer’ credit:
The financial institution and bank outside India fund the buyer based on the importer’s bank guarantee (letter of comfort). The buyer’s credit may be extended from an international bank in the overseas country or a foreign branch of the domestic bank. Buyers Credit Cost helps the local importers get access to cheaper and lower foreign funds, which may be much closer to LIBOR rates. When compared to a local source of funding, it is very cheap because they are costly. According to the local regulation, the buyer’s credit duration may change from country to country. For example, if you apply for buyer’s credit in India, you can avail the buyer’s credit for one year if the import is for tradable goods and three years if it is for capital goods. In addition to this, the buyer’s credit interest may get reset every six months.
Features of buyer’s credit:
- It facilitates exports from the small and medium-sized companies in India by offering buyers credit to foreign purchaser to import goods from India
- Buyers Credit Cost can be offered for finance capital services or products based on the credit term
- It also offers non-recourse finance to the Indian exporter by transforming the postponed credit contracts into the money contract
- Buyers credit can also extend the advance payment process to the Indian exporters in support of the foreign purchaser
- It can extend to one foreign subsidiary of any company in India
- Non-LC transactions can result in saving of the LC charges
Buyer’s credit amount extends for the assets based on the purchaser assets cycle. It may change from months to years for the asset limit based on the purchaser. Even buyers credit amount extends for capital products or goods could vary from one to ten years depending upon the overseas purchaser capability of money generation.
Benefits of buyer’s credit:
- The exporter (lender) gets paid on due date while importer (buyer) gets extended date for making the necessary import payment according to their cash flows
- Based on the sight, the buyer can deal with the exporter and negotiate the best discount. Moreover, you can also use the buyer’s credit route in order to get financing
- Depending on the customer’s choice, the funding currency can be in any form of FCY including USD, EURO, GBP, JPY, and so on
- The buyer can use this financing for any trade format viz. collections, open account, and LCs
- The imports currency can vary from the funding currency that enables buyers to pick a favorable view of the specific currency
As per RBI Directives on LoU based funding , Buyers Credit is currently not available at the moment.