TRADE FINANCE
Fintrade Consultant arranges buyer’s credit for financing import transactions including capital goods.
Buyers’ Credit is available for your business in most major currencies. Use our services to finance your shipment of goods.
Pricing for Buyers’ Credit is linked to of LIBOR rates in exchange market.
The pricing will depend upon the value of Import, country from where the goods are imported, beneficiaries, LC opening Bank and the tenure.
By availing this facility, the importers save considerable interest cost.
1. Buyers Credit -
Buyers Credit is a short term credit available to an importer (buyer) from overseas lenders such as banks and other financial institution for goods they are importing. The overseas banks usually lend the importer (buyer) based on the letter of comfort (a bank guarantee) issued by the importer's bank. For this service the importer's bank or buyer's credit consultant charges a fee called an arrangement fee.Buyer's credit helps local importers gain access to cheaper foreign funds that may be closer to LIBOR rates as against local sources of funding which are more costly.The duration of buyer's credit may vary from country to country, as per the local regulations. For example, in India, buyer's credit can be availed for one year in case the import is for trade able goods and for three years if the import is for capital goods.
Buyers credit Process -
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Importer imports the goods either under DC / LC, DA / DP or Direct Documents.
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Importer requests the Buyer's Credit Consultant before the due date of the bill to avail buyers credit quote.
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Consultant approaches overseas bank for indicative pricing, which is further quoted to Importer.
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If pricing is acceptable to importer, overseas bank issue's offer letter in the name of the Importer.
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Importer approaches his existing bank to get letter of undertaking / comfort (LOU / LOC) issued in favour of overseas bank via swift.
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On receipt of LOU / LOC, Overseas Bank as per instruction provided in LOU, will either funds existing bank's Nostro account or pays the supplier's bank directly (using only MT202 payment mode).
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Existing bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment).
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On due date existing bank to recover the principal and Interest amount from the importer and remit the same to Overseas Bank on due date.
Benefits of Buyer's Credit -
The benefits of buyer's credit for the importer are:
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The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows
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The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing.
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The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.
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The importer can use this financing for any form of trade viz. open account, collections, or LCs.
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The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency.
2. Suppliers Credit -
Supplier’s Credit refers to loan which can be availed by the importers where the Exporter demands sight payment wherein the Importer requires credit. Usance bills under LC is being issued by importer’s bank which they undertake to pay overseas bank after the usance period as agreed in the LC terms. By this means the importer is able to meet the exporter’s expectation of sight payment and benefits by competitive rates
We help arrange for competitive quotes from Banks overseas. For obtaining quote.
Benefits / Advantages for Importer -
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Availability of cheaper funds for import of raw materials and capital goods
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Ease short-term fund pressure as able to get credit
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Ability to negotiate better price with suppliers
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Able to meet the Suppliers requirement of payment at sight For Supplier
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Realize at-sight payment
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Avoid the risk of importer's credit by making settlement with LC.
Process Flow of Transaction -
The benefits of buyer's credit for the importer are:
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With transaction details importer approaches arranger to get suppliers credit for the transaction
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Arranger get an offer from overseas bank on the transaction.
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Importer confirms on pricing to overseas bank and gets LC issued from his bank, restricted to overseas bank counters with other required clauses.
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Suppliers ships the goods and submits documents at his bank counters.
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Suppliers Bank sends the documents to Supplier's Credit Bank.
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Supplier's Credit Bank post checking documents for discrepancies sends the document to importers bank for acceptance.
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Importer accept documents. Importer's Bank provides acceptance to Supplier's Credit Bank LC guaranteeing payment on due date.
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Supplier's Credit Bank based on acceptance, discounts the bill and makes payment to Supplier.
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On maturity, Importer makes the payment to his bank and Importer's bank makes payment to Supplier's Credit Bank.
RBI Regulations -
Over the years there has been many changes in norms. Summary of current rules are given below and for further details please refer RBI Master Direction.
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Maximum Amount Per Transaction : $50 Million
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Above $50 Million, RBI Approval required.
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Maximum Maturity in case of import of non capital goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc): upto 1 year from the date of shipment or operating Cycle whichever is less.
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Maximum Maturity in case of import of capital goods : upto 5 years from the date of shipment (Beyond 3 years banks are not allowed to provide Letter of Undertaking / comfort)
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No Rollover / Extension will be permitted beyond permissible limits
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All-in-cost Ceilings: 6 Month Libor + 250 bps
Advantages of Taking Buyer’s Credit Quotes from a Consultant
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.