Difference between Buyers Credit and Letter of Credit (LC)

1. LC is one of the payment mode used in the International Trade between importer and exporter to cover third-party credit risk. Meaning if the importer defaults, his bank will have to pay on his behalf. Whereas, Buyers credit is a funding mechanism used by importer to funds his transaction.

2. Parties involved during the transaction.

Under Letter of Credit (LC) : Importer, Importer’s Bank, Exporter, Exporters Bank

Under Buyers Credit: Importer, Importer’s Bank, Foreign Bank funding the transaction

3. Under LC, there is movement of goods between export and import, movement of documents and funds between importers bank and exporters bank. Where as in buyers credit there is only movement of money.

4. Bank charges LC commission and usance charges (mainly with PSU). In case of buyers credit your bank charges letter of comfort / undertaking charges and foreign bank charges its interest cost.

5. LC is governed by UCP600 issued by International Chamber of Commerce (ICC). Every LC has a mention of the same. Incase of any dispute between importer’s bank and exporter’s bank, norms given in UCP600 needs to be referred. Normally Letter of comfort does not mention of any specific rules under ICC which also needs to be referred.

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