What it means
Importers often need to pay suppliers before goods are sold, and buyer's credit can support working capital in that gap. With buyer's credit, a foreign lender pays the supplier, and the importer repays the lender after an agreed period.
The importer's local bank often arranges it and may provide a guarantee or letter of undertaking. Buyer credit describes a financing structure, not a single standard term.
An overseas bank can lend to an importer so an exporter receives payment under the trade contract while the importer repays the bank later. Some products are short-term, while official export-credit-supported facilities for capital goods can run for years, so verify the actual tenor, lender and credit agency rather than assuming every buyer credit has the same rules.
Map the cash flows: the lender pays under agreed milestones, then the importer repays it. A local bank may facilitate documents or security, but its role varies, and a letter of credit is a separate payment assurance, not the loan itself.
Banks may request invoices, shipping records, insurance and borrower details, and export-credit programmes have their own goods, country and size rules, so do not apply UK or Indian programme terms automatically to a UAE transaction. The all-in cost must include more than the quoted interest rate: costs include interest, bank fees and currency risk if the loan is in a foreign currency, and facility, guarantee and handling fees, legal expenses and any hedge premium add to the price.
If borrowing is in a foreign currency while sales are in dirhams, exchange moves can outweigh a small interest saving. A hedge may fix or limit that risk but has its own cost and terms, so compare offers in the same currency and over the same cash dates.
Match repayment to the sales cycle. If machines take nine months to sell but finance is due after six, the importer needs another cash source, and a late shipment shortens the selling window without automatically extending the loan.
Stress-test slower orders, customer returns and working-capital needs, and avoid buying extra stock just because financing appears cheaper than a local overdraft. For owners who import, compare supplier credit, a local loan and buyer credit over the same period, since supplier credit may include a higher goods price while foreign finance may add fees and FX risk.
Put each option into a monthly cash plan and spell out assumptions before using any estimate to choose a lender. Record the trade contract, loan conditions, milestones, currency exposure and repayment calendar, and contact the lender before the due date if sales lag rather than assuming an extension.
In practice
Real-world examples.
Example
An importer agrees to buy equipment and an overseas lender pays the exporter under the finance arrangement; the importer later repays principal and interest.
Example
A UAE buyer compares a foreign-currency loan with a local dirham facility, adding fees and hedge costs before choosing.
Example
An importer checks whether the due date falls before its seasonal customers are likely to pay, then budgets a repayment buffer.
Formula
Calculation
All-in cost = Interest + Bank fees + Hedging cost
Worked example. A $1,000,000 buyer's credit for 180 days at 6% a year, using a 360-day convention, with $5,000 of fees and $8,000 of hedging cost.
- Interest is $1,000,000 x 6% x 180 / 360 = $30,000.
- All-in cost is $30,000 + $5,000 + $8,000 = $43,000, or 4.3% of the amount borrowed for the 180 days.
A different day-count convention, rate reset, fee date or exchange rate changes the result. For comparison, if a local overdraft charges 9% a year on the same $1,000,000 for 180 days, interest is $1,000,000 x 9% x 180 / 360 = $45,000, so the buyer's credit is cheaper by $2,000 on these invented numbers, before the extra documentation work.Case study
Seen in the real world.
This illustrative and entirely fictional example follows Horizon Equipment, an invented importer paying suppliers from an expensive overdraft. Horizon compared its overdraft with an overseas lender proposal for a shipment of machines. Its finance manager included guarantee and arrangement fees and modelled a currency hedge, not only the lower quoted rate.
The machines took longer to sell than expected, so Horizon arranged a repayment buffer rather than relying on every customer paying promptly. In this fictional example, total financing cost fell and stock availability improved. The outcome depended on actual sales timing and the hedge terms, not on buyer credit being universally cheaper.
Watch out
Common mistakes.
- Ignoring currency risk.
- Comparing only interest rates and not fees.
- Mismatching repayment dates with sales cycles.
Questions
People also ask.
What is buyer's credit?
It is financing for a buyer in a trade transaction, commonly arranged to pay an exporter while the buyer repays a bank later. Actual tenor and support vary widely.
Who arranges it?
A bank may arrange or provide the loan, and some facilities involve export-credit agency support. The roles and eligibility depend on the product and country.
What are the main risks?
Currency moves, fees, delivery delays and a repayment date before sales proceeds arrive can erase the benefit of a low headline rate. Model the full cash schedule.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related