Buyer’s credit refers to a loan or credit facility provided to the buyer (importer) to finance the purchase of goods or services from a foreign seller (exporter). It is often facilitated by a bank or financial institution and is commonly used in international trade when the buyer needs additional funds to complete the transaction. Unlike other forms of credit, buyer’s credit focuses on providing financing for buyers to pay the seller directly, ensuring that the transaction is completed smoothly.
Features of Buyer’s Credit:
- Loan to the Buyer: The bank or financial institution provides the buyer with a loan to pay the seller. The buyer repays the loan with interest over a predetermined period.
- Typically Long-Term: Buyer’s credit often comes with longer repayment terms, such as 3 to 5 years, depending on the size and nature of the transaction.
- Used for Large Transactions: This form of credit is commonly used in industries like construction, infrastructure, and large-scale machinery procurement, where the buyer may not have sufficient immediate funds but can afford longer repayment terms.
- International Trade: It is mostly used in cross-border transactions where buyers need financing to complete payments for imported goods and services.
Advantages of Buyer’s Credit:
- Flexible Financing: It allows buyers to procure goods or services without having to use their own capital upfront.
- Cost Efficiency: By securing financing through buyer’s credit, the buyer may get better interest rates compared to other loan types, especially if the credit is backed by a reputable financial institution.
- Promotes Trade: Buyer’s credit helps exporters increase sales by providing buyers with the financial flexibility they need
Buyer's Credit can be issued without a Letter of Credit (LC), but it is less common. Typically, Buyer's Credit is linked to an LC because LCs provide security for both the buyer and the lender.
