Buyer's Credit

DEFINITION of 'Buyer's Credit'

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. Credit Default Swap - CDS

    A particular type of swap designed to transfer the credit exposure ...
  2. Export Incentives

    Monetary, tax or legal incentives designed to encourage businesses ...
  3. Private Export Funding Corporation ...

    A single corporation created by the U.S. Treasury and the Export-Import ...
  4. Confirmed Letter Of Credit

    A second guarantee, in addition to a letter of credit, that commits ...
  5. Export Credit Agency - ECA

    A financial institution or agency that provides trade financing ...
  6. Import And Export Prices

    Two indexes that monitor the prices of imports and exports in ...
Related Articles
  1. Credit & Loans

    The Basics Of Lines Of Credit

    Lines of credit are potentially useful hybrids of credit cards and normal loans. Learn how a line of credit can help (and hurt) your finances, and how to find the best one to suit your needs. ...
  2. Insurance

    The Causes And Effects Of Credit Shocks

    These shocks cycle through history. Find out what you need to know to avoid the alarm bells.
  3. Credit & Loans

    Credit, Debit And Charge: Sizing Up The Cards In Your Wallet

    Not all plastic is equal! Learn the difference between the three kinds, and how each can affect your finances.
  4. Credit & Loans

    How Your VantageScore Credit Report Is Calculated

    Deficiencies in the FICO credit report have led to the creation of a new credit scoring system - the Vantagescore. Find out what factors determine this credit score, and how the model can benefit ...
  5. Professionals

    Why Bad Credit Is Bad For Financial Careers

    In order to obtain and maintain a career in the financial industry, it is also important to have a clean credit report.
  6. Taxes

    Get A Tax Credit For Your Foreign Investments

    The foreign tax credit provides a break on investment income made and taxed in a foreign country.
  7. Professionals

    Getting Accredited For A Career In Credit Analysis

    We go through the education and certifications you need to join this growing field.
  8. Retirement

    The Bright Side Of The Credit Crisis

    Find out how this tough economic period can be a learning experience for all.
  9. Credit & Loans

    Analyzing A Career In Credit Analysis

    If you're a number-cruncher and responsibility doesn't scare you, this could be the job for you.
  10. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
RELATED FAQS
  1. What's the difference between a bank guarantee and a letter of credit?

    A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure ... Read Full Answer >>
  2. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
  3. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  4. When do I need a letter of credit?

    A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a financial institution, ... Read Full Answer >>
  5. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  6. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center