Buyer’s credit is a low-cost import-financing product available in the market for a while. It allows the importer more time to make the payment at a very low additional interest cost, while the exporter immediately receives the payment, making it an ideal product for the importers.
The importer can either go to his bank for availing Buyer’s Credit or to a consultant who deals with arranging Buyer’s Credit quotes. A bank in India typically might have 5-10 tie-ups with their own subsidiaries outside India or associate FI’s who would provide quotes. However, a consultant of repute might have more than 50 tie-ups across the globe and various time zones helping them to provide much better or cheaper quote vis-a-vis a bank’s quote. Typical costs associated with Buyer’s credit are as below:
Interest Cost (Charged by the overseas bank funding the transaction) + LOU Charges (Charged by the importer’s bank for letter of undertaking issuance) + Arrangement Fee (Charged by the the Consultant for arranging the quote. Few banks also charge this on top of LOU issuance) + Withholding Tax (Only in cases where it is applicable).
Availing the Buyer’s Credit quotes from the consultant in most cases can result in interest reduction of 50 to 100 bps or more, making it more affordable than a quote from the bank. Considering the rest of the process, until funding remains the same, it makes more rational for an importer to evaluate the overall cost before proceeding with the transaction either with the bank or the consultant.
Few other Benefits:
A reputed consultant can also help with following up on timely funding, obviating delays in exporter receiving the payment.
Consultant can guide the customer from end to end, making the whole process convenient especially for the importers who are availing such products for the first time.
Right consultants can also advise the importer on various hedging solutions, limiting the risks associated with adverse movement of foreign exchange.
Can help the importer understand the pulse of the market on buyer’s credit and associated costs making it easier for them to avail the same in future.