Buyer’s Credit
Buyer’s Credits are a form of Eurocurrency loans designed to finance a specific transaction involving import of goods and services. Under this arrangement, lending bank(s) pay the exporter on presentation of shipping documents. The importer works out a deferred payment arrangement with the lending bank, which the bank treats as a loan. Large loans are club loans or syndicated loans. Many provisions in the loan agreement are quite similar to a general purpose syndicated credit. However, a number of formalities have to be completed before the exporter can draw funds. The interest rate of the loan is linked to a market index such as LIBOR. In some cases, a state Export Credit Agency from the exporter’s country may pay a subsidy to the banks so that an attractive funding cost can be offered to the importer.
Another aspect is the Line of Credit. Lines of Credit are like buyers credits but are much wider in scope. A typical buyer’s credit involves one transaction between one supplier and one buyer. A line of credit covers several purchase transactions with the buyer importing different items from different suppliers. Many buyers can also be involved provided the ultimate credit risk is that of a single buyer or guarantor.
Supplier’s Credit
In a supplier’s credit, the exporter extends credit to the importer by allowing it to pay on a deferred payment basis. Promissory notes issued by the importer evidence the credit. Like in forfeiting, the supplier can discount the paper with a bank. The payments made by the buyer under the promissory notes are assigned to the lenders and may be routed to them directly or through the supplier. Again the supplier may have to share the responsibility of pursuing payment on the bank’s behalf in case of default on the part of the buyer.