The buyer’s credit process typically has the following steps:
- The exporter enters into a commercial contract with the importer for supply of goods or services.
- The importer obtains a Letter of Undertaking (LOU) from his bank/financial institution to finance the purchase.
- The importer’s bank thereafter sends LOU to exporter bank which in turn takes risk on Importer bank and assures payment to the exporter.
- Once the exporter ships the goods, the lending bank pays the exporter as per the terms of the contract with the buyer.
- On final day LOU issuing bank makes the payment to the exporter and thus settles the liability of the importer towards the exporter.
- On the due date, the importer either requests for the rollover of the buyers credit or retires the liability towards the bank against the LOU.
The importer makes principal and interest payments to the lending bank according to the terms of the loan agreement until the loan has been repaid in full.