Buyer's credit

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[edit] Buyers credit (Buyer's Credit)

In the usual practice, an importer requests his bank to open a Letter of Credit. When the Letter of Credit is honoured i.e, when the importer's Bank makes payment on behalf of the importer, the importer reimburses the money so paid by the importer's Bank. However, in the case of Buyer's Credit, the importer requests LC opening Bank to pay the dues on behalf of the importer. Thus this is a form of credit facility given to the importer.

[edit] Steps involved in buyer's credit

Step 1: Importer requests for arranging buyer's credit. He will execute necessary documentation favouring the Bank. Step 2: the Bank arranges an External Commercial Borrowing with one of the banks abroad with whom the Bank has tie up. For this, the Bank will provide an undertaking to make payment on the new due date. Technically, the Bank abroad treats this as a credit facility provided to the bank extending the credit facility. It is not concerned with the importer. Step 3: The Bank credits the funding Bank's nostro account, and in turn, the Bank pays off the exporter (or the negotiating bank). Step 4: For all practical purposes, the LC gets extinguished. The books of the Bank funding the Buyer's Credit should show this liability as a contingent liabilities on account of the buyer's credit. Step 5: On the new due date, importer pays the funding Bank. With this, the transaction gets closed.