Why buyer's credit is getting popularity? Mention some drawbacks of using the buyer's credit.

Buyer’s credit is a financing facility where a bank or financial institution provides finance to the importer so that the exporter can receive payment immediately.

Reasons for popularity

(1) Immediate Payment to Exporter: The seller receives payment immediately, so the seller does not have to wait for the buyer’s repayment.

(2) Lower Financing Cost: The buyer can often obtain foreign currency finance at a competitive rate linked to a benchmark such as SOFR plus a margin.

(3) Less Pressure on Local Credit: It helps importers finance capital machinery and industrial raw materials without putting too much pressure on their domestic currency credit limits.

(4) Reduced Seller’s Credit Risk: Since the financing is provided to the buyer, the seller does not have to provide long-term credit to the buyer.

Drawbacks of buyer’s credit

(1) Foreign Exchange Risk: The buyer has to repay the foreign currency loan, so depreciation of BDT can increase the repayment burden.

(2) Higher Interest Cost: If the international benchmark interest rate increases, the overall cost of buyer’s credit may also increase.

(3) External Liability: Excessive use of buyer’s credit can increase the country’s foreign currency liabilities and external debt.

(4) Eligibility Requirement: The facility generally requires good credit standing and proper documentation, so smaller or new importers may find it difficult to obtain.