A letter of credit (LC) is a form of documentary credit and is probably the least risky mechanism for the settlement of international trade transactions, for both exporter and importer. It involves using a bank as a trusted 3rd party to guarantee the transaction and ensure that goods are supplied, and payment made, according to the agreed-upon terms.
Typical Process & Parties Involved
- The importer requests their bank (the issuing bank) to open an LC.
- The issuing bank then sends the LC to the exporter’s bank (the nominated bank).
- The Exporter hands the goods and documents over to their freight forwarder.
- The Freight Forwarder then consigns the goods and hands it over to the relevant carrier and obtains the Bill of Lading and other shipping documents.
- The freight forwarder will then hand these documents over to the exporter or present these documents, on behalf of the exporter, to the nominated bank.
- The nominated bank ensures that the documents are in compliance with the terms of the LC and then collects the payment from the issuing bank on behalf of the exporter.
- The importer’s account at the issuing bank is debited for the agreed upon amount.
- Once payment is made, the issuing bank will release the documents to the importer so that they can claim the goods from the carrier and clear the shipment through customs.
Some Tips for Exporters
Talk to Your Bank – Share all details of your transaction openly. Your bank can advise you about potential risks, such as exchange rate risk and others, and help you minimize this.
Include Every Detail – Agree clearly with your buyer and include all details in the LC.
Make Sure You Can Deliver – Ensure that you can meet all the time limits within the terms of the LC. If you cannot, ask to change it. Otherwise, you could end up in violation of the terms of the LC.
Discrepancy Opportunities – Be weary of any terms that may become opportunities for the buyer to delay or default.
Selecting the Right Trade Finance Partner
Choose a bank that is a specialist in trade finance to represent you in your dealings. This is a complex area with many loopholes, so you need a team of experts to back you up. Furthermore, you need a bank that has embraced the latest digital technology to keep up with modern trends and also to deal with the difficulties that the post-covid world has brought with it.
At Euro Exim Bank, we have extensive experience in trade finance and have been a pioneer in adopting the latest digital technology such as blockchain to enable cutting-edge solutions that include electronic LCs, other trade finance services such as factoring and our unique Exim Wave global settlements platform, offering international settlements across more than 150 currencies.
