Buyer's Credit - A Source of Finance

When Indian concern purchases goods from foreign supplier against letter of credit then the Indian concern can avail buyer’s credit arrangement. It is a source of finance provided by banks in foreign currency against foreign letter of credit. Before the due date of letter of credit Indian concern contact with its banker and request to banker to arrange the further credit against letter of credit. Indian bank contact some foreign bank and arrange further credit. After confirmation from foreign bank, Indian bank made payment of letter of credit on due date and supplier of goods received the payment on due date. Later on buyer made the payment to Indian banker as per buyer credit agreement or can also request for further roll over buyer’s credit.

Benefits of buyer’s credit:

• Rate of interest is linked with LIBOR and the effective cost of finance is very less as compared to term loan in Indian currency or cash credit.
• Buyer avails the further credit in addition to letter of credit.
• Supplier of the goods received the payment as per LC payment terms.
• Buyer can also request for further roll over buyer’s credit.

Example of buyer’s credit:

• ABC Ltd, India entered into agreement with XYZ Ltd, New York, for purchase of machinery.
• ABC Ltd, India opens LC through SBI, India (Issuing bank). XYZ Ltd, New York is beneficiary and American Bank, New York is the banker of XYZ Ltd.
• Before due date of LC, ABC Ltd requests to SBI, India to arrange buyer’s credit against LC.
• SBI, India contact with SBI New York for arrangement of funds. After receiving quotes from SBI New York, SBI India provides the terms and conditions of buyer’s credit to ABC Ltd.
• ABC Ltd accepts the term and conditions of buyer’s credit.
• SBI New York remits the payment to American Bank New York and XYZ Ltd receives the payment.
• On due date of buyer’s credit, ABC Ltd makes payment with interest to SBI India.
• SBI India then remits the payment to SBI New York.