Buyer’s credit is a short term credit available to an importer from overseas lenders such as banks and other financial institutions for goods they are importing. on the basis of an Standby Letter of Credit (SBLC) issued by the importer’s bank, the overseas banks lends the funds to an importer by crediting the nostro account of the Issuing bank. The funds received are used to make payment to exporter’s bank against import bill on the due date. These funds are charged close to LIBOR rates, this is less expensive than the local source of funds. They are calculated as LIBOR + Margin rates
LIBOR (London interbank offered rate) is a benchmark rate that represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans. LIBOR is an average value of the interest-rate which is calculated from estimates submitted by the leading 11 to 18 global banks on a daily basis..Libor is calculated for five currencies and seven maturities which leads to a total of 35 different LIBOR rates calculated and reported each business day at 11:45 am IST.
The cost involved in buyer’s credit includes Interest cost. This is charged by overseas bank as a financing cost. LIBOR + Spread (maximum 250 bps)& Swift& Negotiation Charges (Charged voluntary by bank) and Withholding Taxes (in case availing trade credit from foreign Banks). Normally it is quoted as say “3M L + 250bps”, where 3M is 3months, L is LIBOR, and bps is Basis Points (A unit that is equal to 1/100th of 1%). To put it simpler: 3M L + 3.50%. One should also check the tenure which is used for LIBOR, as depending on tenure LIBOR will change.
You must fulfill the following conditions in order to avail Buyers credit:
Interest rate is calculated by the following process:
Bank mentions interest rate on Offer letter as follows:
For instance, if a customer avails Buyers credit of $100k from financial institution for 90 / 180 days, below interest will be applicable in above two situations
1 USD = INR 69
BPS (Basis Point) = 0.5%
3 Months LIBOR = 2.7%
6 Months LIBOR = 2.8%
= 100000*69*3.2*90/360*1/100 = 55200
=100000*69*3.3*90/360*1/100 = 56925
Buyer’s Credit: Advantages
Buyers Credit Process
In order to avail credit to finance import payments the customers should be an existing current account holder in a bank. Buyer’s credit can be availed on a transaction basis. The RBI, in its circular on external commercial borrowing and trade credit has laid down some parameters on the process flow for importers to access buyer’s credit.
The process flow is represented in the info-graphic mentioned below.
Buyer’s Credit: Expenses Involved in it
BPS- “Basis Point” is a quantity which is equal to 1/100th of 1% and this is put across as 3M L+ 2.50%
Libor- This differs with the tenure.
Benefits of Taking Buyer’s Credit via Vital Support from Myforexeye
One of the vital aspects of deriving this kind of credit facility is to keep a tap on the interest rate cost. While negotiating with the banks can stand out to be a great challenge for any importer, with the help of Myforexeye however this challenge too can be mitigated in best ways. We are in this service business for quite some time now. We make a gamut of transactions and for this; we generally reach out to overseas banks. This therefore allows us to negotiate with banks to lower their interest rates on buyer’s credit. Quick check on how we can help you out to finance your import payments-
Why wait long? Add your deal now and get benefitted in deriving credit facility to finance your import payments.
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