Buyer’s Credit refers to loans for payment of imports into India arranged on behalf of the importer through an overseas bank.
Based on letter of undertaking of Importer’s bank, Overseas bank credits the nostro of the importer’s bank.
Importer’s bank uses the funds and makes the payment to the Suppliers bank against the import bill on due date.
Benefits of Buyer’s Credit
- 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 in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.
- The importer can use this financing for any form of trade viz. open account, collections, or LCs.
- The currency of imports can be different from the funding currency, which enables importers to take a favorable view of a particular currency.
Letter of Credit Discount (LC Discount)
The Letter of Credit from the prime banks or financial institutions is considered as a complete security.
A borrower can offer the LC to the lender and get the loan sanctioned.
The loan amount may be up to 100% of the LC value. Once the Letter of Credit is executed the amount against LC is settled by the lender against the loan disbursed to the borrower.
Benefits of LC Discounting
- Enables you to receive payment more promptly – you won’t have to wait for your buyer to pay you at a future date.
- Helps you to improve your cashflow.
- Gives you the ability to offer your trading partner longer payment terms, which can put you in a stronger negotiating position and improve your relationship.
- Allows you to pay your suppliers early and can help place you in a position to negotiate better pricing.