Buyers 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. Based on the letter of comfort issued by the importer’s bank , the overseas banks lends the importer. 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 global banks on a daily basis. Libor rates are calculated for ten currencies and 15 borrowing periods, they are published daily at 11:30 AM.
The cost involved in Buyers Credit includes Interest cost. This is charged by overseas bank as a financing cost. LIBOR + Spread (maximum 350bps)[compulsory], Swift Charge (voluntary by bank) and Withholding Taxes (foreign Banks). Normally it is quoted as say “3M L + 350 bps”, 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 fulfil the following conditions in order to avail Buyers credit:
1. Maximum duration of Buyers credit facility for capital goods is 3 years.
2. Maximum duration of Buyers credit for Non Capital goods is 1 year.
3. Maximum credit limit per Buyers credit transaction is $20 Million.
4. Maximum Maturity in case of import of capital goods for companies classified as Infrastructure sector is up to 5 years from the date of shipment.
5. No financing is allowed for advance imports.
6. Ceiling cost of Buyers credit is 6 months LIBOR +350 BPS (L+350 BPS)
Interest rate is calculated by the following process:
Bank mentions interest rate on letter mostly as bellow
1. 3M L + 50 BPS (volume along with specific Tenure will be mentioned)
2. 6M L + 50 BPS (volume along with specific Tenure will be mentioned)
For instance, if a customer avails Buyers credit of $100k from Financial institution for 90 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%
1. 3M L + 50 BPS = 3.2%
= 100000*69*3.2*90/360*1/100 = 55200
2. 6M L + 50 BPS = 3.3%
=100000*69*3.3*90/360*1/100 = 56925
Interest rate cost must be carefully viewed when availing buyer’s credit. One must always find ways to lower their interest rate cost. Myforexeye is India’s first technology platform that offers cheap and instant Buyers credit quotes. We are specialized in this service; we make a pool of transactions and reach out to overseas bank, which make banks to lower their interest rates.
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