Buyers Credit Means
A buyers credit means is a credit facility which can be extended to an importer by an overseas lender such as a bank or financial institution. This is a short-term loan facility to finance the purchase of capital goods, services, and other costly items. A buyer’s credit is a vital financing method in international trade as it plays a very dynamic role in international trade and gives importers access to cheaper funds compared to what may be available locally.
- A buyer's credit is a loan for short-term to an importer by an overseas lender for the purchase of goods or services.
- An export finance agency guarantees the loan, mitigating the risk for the exporter.
- A buyer's credit allows the buyer, or the importer, to borrow at rates lower than what would be available domestically.
- With buyer's credit, exporters are guaranteed payments on the due date.
- A buyer's credit ensures that an exporter executes large orders and allows the importer to obtain financing and flexibility to pay for large orders.
- The reason behind is complexity involved, buyer's credit is only made available for large orders with minimum monetary thresholds.
Process of buyer’s credit
There are several steps involved in the buyer's credit process.
- Firstly, the exporter enters into a commercial contract with a foreign buyer or importer. The contract specifies the goods or services supplied along with prices, payment terms, etc.
- Then, the buyer obtains credit from a financial institution for the purchase. An export credit agency based in the exporter’s country provides a guarantee to the lending bank to cover the risk of default by the buyer.
- As the exporter ships the goods, the lending bank pays the exporter according to the contract terms.
- The buyer makes principal and interest payments to the lending bank according to the loan agreement until the loan is repaid in full.