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Is Buyers’ Credit appropriate to fund expansion?

CFO Services

From our blog: TUESDAY, NOVEMBER 27, 2012

 

As a corporate finance solution provider, every day I meet customers who ask me questions.  Some of these appear simplistic but I always found them to make me introspect deeply and therefore always enriching.

 

A couple of days I met a CFO of a company which is planning to set-up a new expansion unit.  The discussions was on funding the expansion, prevailing high interest rate and naturally minimizing borrowing costs.

 

I suggested foreign currency loan.  The CFO immediately shot back, "Buyers' Credit?".  

 

I said "it is for trade finance, and short term in nature".

 

He said, "it can be availed for one year and rolled-over for further periods".

 

I was surprised by the alacrity of the Indian mind and how it tries to find innovative solutions. 
Of course, it is technically possible but has the following two critical limitations:

·       A rollover optional in the hands of the lender and not the borrower.  The lender (bank extending buyers credit) may either not have sufficient credit lines available or may not simply be interested to rollover;

·       In a buyer's credit arrangement, the entire sum has to be repaid in one shot, whereas if the organization had taken a foreign currency loan, the sum could be paid in easy installments over a comfortable period of say five to seven years!

 

So, it is always safe and advisable to fund an expansion project through a foreign currency loan and not through buyers' credit.

 

 

 

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