Buyer's Credit Definition & Overview

KEY TAKEAWAYS

• A buyer’s credit is a type of short-term loan that gets used by an importer to purchase certain goods or services from an overseas lender.
• Exporters are guaranteed to receive payment on the due date through a buyer’s credit.
• Buyer’s credit provides opportunities for the buyer or importer to borrow the loan at a rate that’s lower compared to those that are offered domestically.
• Buyer’s credit is often only available for larger than usual orders that have minimum monetary thresholds. This is since there is a high level of complexity involved in the process.

What Is Buyer’s Credit?

Buyer’s credit is a type of short-term loan that gets extended to an importer by an overseas lender. The credit is issued by a bank or financial institution to help facilitate and finance various purchases. These can include different services, capital goods, and some other big-ticket items.

When the importer receives the issued loan, they become the buyer of the goods. On the flip side, whoever is exporting the goods becomes the official seller. Buyer’s credit can be incredibly useful as a financing method in international trade.

This is because it provides importers additional access to a range of products for cheaper compared to what might be available in the local market.

How Does Buyer’s Credit Work?

A bank that extends credit to an importer of goods is considered to be a buyer’s credit facility. In this process, it also includes an export finance agency that needs to be located in the exporters country. This is so that the loan can be guaranteed.

There are several parties and moving parts included when it comes to cross-border legalities. So buyer’s credit is typically only available as an option for larger export orders that have a high minimum threshold.

As well, this works similarly for exporters. The simple availability of a buyer’s credit creates the possibility for a seller to pursue much larger export orders.

But there can be a few things worth noting. For example, the importer is going to have some added flexibility to pay for what they purchase over a set period of time. This duration is usually established in the terms of the credit facility.

The importer also has the ability to request their funding in a major currency. They do this because a major currency will often be much more stable compared to a domestic currency. And this is especially the case if the local currency has a risk or possibility of devaluation.

The Buyer’s Credit Process

There can often be many steps involved in the buyer’s credit process. First, the exporter needs to enter into a commercial contract with a foreign buyer or importer. The contract is going to provide an overview of any goods or services that will get supplied as well as payment terms and prices.

The buyer is then going to receive credit from their bank or financial institution for the purchase they will make. After this happens, an export credit agency will provide a guarantee to the lending bank. They’re going to be located in the exporter’s country and this is done to cover any possible risk of default by the buyer.

The exporter will then ship the goods and the lending bank will pay them according to the contract terms. From here, the buyer will end up making any interest and principal payment back to the lending bank until the loan is paid off.

Advantages of Buyer’s Credit

There can be some great advantages to a buyer’s credit that can make a difference for both the importer and exporter.

• Borrowing rates are typically cheaper compared to domestic lenders
• Rates are usually based on London Interbank Offered Rate (LIBOR)
• Importers receive an extended time period to make repayments
• Payment is made to exporters according to the terms of the sales contract and on time
• The certainty of payment makes managing loan receivables easier

Summary

Buyer’s credit works as a short-term loan for importers when they want to make purchases from an overseas lender. The credit gets issued to help facilitate and finance the goods or services that are being purchased.

The process for buyer’s credit begins when an exporter enters into a commercial contract with an importer or buyer. A bank or financial institution will provide a credit and there will be a guarantee to the lending bank.

It’s a great way to get borrowing rates cheaper and for importers to have a little longer to make repayments. The overall certainty of the payment makes managing a buyer’s credit loan more efficient.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.