Buyers Credit is a short term credit available to an importer (buyer) from overseas lenders such as banks and other financial institution for goods they are importing. The overseas banks usually lend the importer (buyer) based on the letter of comfort (a bank guarantee) issued by the importer's bank. For this service the 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 that may be closer to LIBOR rates as against local sources of funding which are more costly.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 tradeable goods and for three years if the import is for capital goods.
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 depending on the choice of the customer and availability of LIBOR rates in the exchange market.
- The importer can use this financing for any form of payment mode; open account, collections, or LCs.
- Hedging might be required as foreign currency is involved hence making Buyer's Credit a risky affair at times.
Steps involved :
- The customer requests the Buyer's Credit Arranger to arrange the credit before the due date of the bill
- 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.
- It helps importer in working capital management.
Cost involved :
- Interest cost: 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.
- 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.
Indian regulatory framework -
Banks can provide buyer’s credit up to US$20 million per import transactions for a maximum maturity period of one year from date of shipment. In case of import of capital goods, banks can approve buyer’s credits up to $20 million per transaction with a maturity period of up to three years. No rollover beyond that period is permitted. As per RBI directives dated 11.07.13, at the time of availment of trade credit, the period of trade credit should be linked to the operating cycle and trade transaction. A All cost ceiling includes arranger fee, upfront fee, management fee, handling and processing charges, out-of-pocket and legal expenses, if any.All-in-cost ceiling per annumBenchmark rate plus 250 bps spread.