What is an Export Letter of Credit?
Exporters face the greatest risk in international trade unless they can secure payment in advance of shipping their goods. However, the competitive nature of the world economy often demands that Exporters ship their goods before receiving payment. LCs provide Exporters with the confidence to allow them to ship their goods in advance of the receipt of payment. An LC is a conditional payment guarantee provided by the Importer’s bank to the Exporter. The Exporter normally receives the payment guarantee prior to the shipment of goods. The payment guarantee is conditional upon the Exporter providing documentary evidence of the shipment of goods in accordance with the terms of the LC.
LCs may be confirmed (i.e. the credit risk of the Importer’s bank can be underwritten by the Exporter’s own bank), thus eliminating an Exporter’s risk of non-payment resulting from default by the Buyer, their bank or a country risk event. This would require credit approval for the Exporter’s bank.
How does the process work?
The Importer's bank will guarantee the payment to the Exporter either immediately upon receipt of the correct documents or at some future determinable date e.g. 60 days from sight (by the bank) of the shipping documents or 90 days from Bill of Lading date. LCsare issued subject to the Uniform Customs and Practice for Documentary Credits issued by the International Chamber of Commerce.
Steps 1-4 (Issuance)
- Payment is guaranteed by the Importer’s bank prior to shipment
- The conditional nature of the payment guarantee provides the Exporter with control in securing the funds
- LCs can eliminate an Exporter’s risk of non-payments a result of default by the Buyer
- LCs may be confirmed
- LCs can provide access to post shipment non-recourse financing
- LCs reduce the need for a credit control function
- LCs provide certainty in relation to the payment date (facilitating booking Forward
- Contract to cover any foreign currency exposures).
Restrictions / Disadvantages
- Documents must be prepared and presented in strict compliance with the requirements stipulated in the LC
- If the Exporter does not meet all the conditions set out in the LC, they run the risk of delayed or even non-payment.
For further information please contact your Relationship Manager or our Trade Finance team.