Buyers Credit

Buyer's credit is a financing arrangement provided by a financial institution to an importer to finance the purchase of goods or services from an overseas supplier. It is a short- to medium-term credit facility that helps importers manage their cash flow by providing them with access to funds to pay for imports.

Here are the key details and workings of buyer's credit :

• Purpose: Buyer's credit is primarily used to facilitate international trade transactions. It allows importers to defer their payment obligations to overseas suppliers and secure financing to bridge the gap between the purchase and receipt of goods or services.


• Financial Institution: Buyer's credit is typically provided by banks or financial institutions with expertise in trade finance. The financial institution assesses the creditworthiness of the importer and, if approved, extends the credit facility based on the agreed terms and conditions.

Parties Involved :

• Importer/Buyer: The importer is the party that requires financing to purchase goods or services from an overseas supplier. They seek buyer's credit to obtain funds for the import transaction


• Exporter/Supplier: The exporter is the overseas supplier who sells goods or services to the importer on credit terms. The exporter may receive payment directly from the financial institution providing the buyer's credit, enabling them to receive payment promptly.


• Financial Institution: The financial institution provides the credit facility to the importer, enabling them to make payment to the exporter. The institution assesses the creditworthiness of the importer and manages the credit risk associated with the transaction.

Working Mechanism :

• Credit Application: The importer applies for buyer's credit with the financial institution, providing necessary documents such as purchase orders, invoices, and other trade-related documentation.


• Credit Evaluation: The financial institution assesses the creditworthiness of the importer, considering factors such as their financial position, credit history, and the underlying trade transaction's viability.


• Credit Facility: If approved, the financial institution offers a credit facility to the importer. The facility specifies the maximum loan amount, interest rate, repayment terms, and any other conditions.


• Import Transaction: The importer proceeds with the import transaction, purchasing goods or services from the overseas supplier.


• Payment to Exporter: Upon receipt of the necessary trade documents, the financial institution disburses the funds directly to the exporter on behalf of the importer.


• Repayment: The importer repays the buyer's credit facility to the financial institution as per the agreed repayment terms. This can be done through installment payments or a lump sum repayment.

Benefits :

• Cash Flow Management: Buyer's credit allows importers to manage their cash flow effectively by providing financing for imports. They can defer payment obligations and align cash outflows with the receipt of goods or services.


• Competitive Financing: Buyer's credit can offer competitive interest rates compared to other financing options, making it an attractive choice for importers.


• Trade Facilitation: It promotes international trade by enabling importers to engage in transactions that they may not have been able to undertake due to limited immediate funds.


• Simplified Transaction: Buyer's credit simplifies the payment process by providing a streamlined mechanism where the financial institution directly pays the exporter, reducing the administrative burden on importers.

Risks and Considerations :

• Credit Risk: Financial institutions assess the creditworthiness of importers before extending buyer's credit. However, there is always a risk of default or non-payment by the importer, which the financial institution needs to manage.


• Currency Risk: Buyer's credit may involve foreign currency transactions, exposing importers to exchange rate fluctuations and potential currency risk.


• Regulatory Compliance: Importers and financial institutions must comply with applicable trade finance regulations, anti-money laundering (AML) laws, and other legal and regulatory requirements.

Buyer's credit provides importers with a convenient financing solution to support their international trade transactions. By leveraging buyer's credit, importers can effectively manage their cash flow, meet payment obligations to overseas suppliers, and foster ongoing trade relationships.