Buyer's Credit

What is a 'Buyer's Credit'

A buyer's credit is a loan facility extended to an importer by a bank or financial institution to finance the purchase of capital goods or services and other big-ticket items. Buyer’s credit is a very useful mode of financing in international trade, since foreign buyers seldom pay cash for large purchases, while few exporters have the capacity to extend substantial amounts of long-term credit to their buyers. A buyer’s credit facility involves a bank that can extend credit to the importer, as well as an export finance agency based in the exporter's country that guarantees the loan. Since buyer’s credit involves multiple parties and cross-border legalities, it is generally only available for large export orders, with a minimum threshold of a few million dollars.

BREAKING DOWN 'Buyer's Credit'

Buyer’s credit benefits both the seller (exporter) and buyer (importer) in a trade transaction. The exporter is paid in accordance with the terms of the sale contract with the importer, without undue delays. The availability of buyer’s credit also makes it feasible for the exporter to pursue large export orders. The importer obtains the flexibility to pay for the purchases over a period of time, as stipulated in the terms of the buyer’s credit facility, rather than up front at the time of purchase. The importer can also request funding in a major currency that is more stable than the domestic currency, especially if the latter has a significant risk of devaluation.

The export finance agency's involvement is critical to the success of the buyer’s credit mechanism, since its guarantee protects the bank or financial institution that makes the loan to the foreign buyer from the risk of non-payment by the buyer. The export finance agency also provides coverage to the lending bank from other political, economic and commercial risks. In return for this guarantee and risk coverage, the export agency charges a fee or premium that is borne by the importer.

The buyer’s credit process typically has the following steps: The exporter enters into a commercial contract with the foreign buyer that specifies the goods or services being supplied, prices, payment terms, etc. The buyer obtains credit from a bank or financial institution to finance the purchase. An export credit agency based in the exporter’s country provides a guarantee to the lending bank covering the risk of default by the buyer. Once the exporter ships the goods, the lending bank pays the exporter as per the terms of the contract with the buyer. The buyer makes principal and interest payments to the lending bank according to the terms of the loan agreement until the loan has been repaid in full.

RELATED TERMS
  1. Trade Finance

    The financing of international trade. Trade finance includes ...
  2. Financial Buyer

    A type of buyer in an acquisition that is primarily interested ...
  3. Trade Credit

    An agreement where a customer can purchase goods on account (without ...
  4. Vendor Note

    A type of debt instrument used in a particular type of short-term ...
  5. Owner Financing

    When a property buyer finances the purchase directly through ...
  6. Export Trading Company - ETC

    An independent company that provides support services for firms ...
Related Articles
  1. Term

    What's Trade Finance?

    Essentially, trade finance makes it possible and easy for exporters and importers to trade, and its expansion has accommodated a massive international trade growth.
  2. Term

    Understanding Net Exports

    Net exports are the difference between a country’s exports and imports.
  3. Term

    Growth and Politics In Exports

    An export is a good or service that is shipped from one country to another for sale or trade.
  4. Economics

    Interesting Facts About Imports And Exports

    Imports and exports exert a profound influence on the consumer and the economy. Learn what affects these figures, and in turn how these figures affect the economy.
  5. Home & Auto

    Rent-To-Own Homes: How The Process Works

    Here's what to watch for when negotiating a contract for a rent-to-own home – and who is a good candidate for this option.
  6. Economics

    Understanding Terms of Trade

    Terms of trade measures a country’s trading efficiency.
  7. Home & Auto

    The Pros and Cons of Owner Financing

    Details on the upside and risks of this type of deal for both the owner and the buyer.
  8. Options & Futures

    Housing Deals That Fall Through

    Find why buyers back out and what you can do if you're left holding the bag.
  9. Home & Auto

    Rent-To-Own Homes: How The Process Works

    A rent-to-own agreement can benefit homebuyers with bad credit or insufficient funds for a down payment. Here’s how one works.
  10. Investing

    Letter of Credit

    A letter of credit is a document from a bank promising to pay the holder a certain amount if the holder fulfills certain obligations. Sellers in commercial transactions often require buyers to ...
RELATED FAQS
  1. What's the difference between a letter of credit and a bank guarantee?

    Learn how letters of credit and bank guarantees differ, how they are used by banks and companies, and how buyers apply to ... Read Answer >>
  2. Why do long-term care insurers require the loss of two Activities of Daily Living ...

    Find out why an importing or exporting merchant might turn to a banker's acceptance to help facilitate an international trade ... Read Answer >>
  3. When are you legally required to get a letter of credit?

    Learn how exporters or importers who deal in international trade use letters of credit to ensure that transactions are safe, ... Read Answer >>
  4. What is a bank's legal liability when issuing a letter of credit?

    Learn the responsibility of banks that issue letters of credit Letters of credits ensure payment on transactions between ... Read Answer >>
  5. What is a trade deficit and what effect will it have on the stock market?

    A trade deficit, which is also referred to as net exports, is an economic condition that occurs when a country is importing ... Read Answer >>
  6. What is a forward contract against an export?

    Understand forward exchange contracts in exporting, and learn the purpose of using a forward contract and its advantages ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center