December 7, 2020

For both importers and exporters, a letter of credit (LC) usually offers the best protection and assurance of payment and delivery. Banks will act as trusted intermediaries to the transaction and guarantee payment, once the necessary conditions are fulfilled. Additionally, for importers, an LC can be used as collateral against which to obtain financing for the shipment. Overall, it is the safest and most standardized way to govern and settle international trade transactions, as the rules are generally similar around the world.

How They Work 

While there can be many banks and beneficiaries involved, an LC usually works as follows. The importer will request their bank to draw up an LC for the desired value and with the desired terms. The importer’s bank will then send the LC to the exporter’s bank. Now the LC is official. Once the shipment has been successfully consigned, the exporter will present the invoice and shipping documents to their bank, who will examine them and then send them across to the importer’s bank. Once everything checks out, the payment will be made, less any fees the banks may charge.  

This kind of LC is usually referred to as a sight LC as payment is due ‘on sight’ of the documents. However, other types can also exist. Discussing all of the various types is beyond the scope of this article, but commonly used ones include standby, irrevocable/revocable, deferred payment, red clause, back-to-back, and confirmed/unconfirmed LCs. Each of these variations has its own use cases. LCs can be amended if all parties are in agreement. 

Parties Involved 

In a standard, basic LC there are four parties involved: the applicant (importer), beneficiary (exporter), issuing bank (importer’s bank), and advising bank (exporter’s bank). However, additional parties may become involved in certain circumstances, such as when more than two parties are involved in a trade deal or when an extra intermediary bank needs to get involved.   

Margin 

To issue an LC, banks may demand a certain percentage value of the shipment to be placed as a margin. This can usually be done either in cash or cash-like instruments/assets. In some jurisdictions, this may be a mandatory requirement. Importers may also keep collateral with their banks, such as property, against which LCs can be issued.  

Documents Required 

This may vary depending on the jurisdiction, but usually, the following documents will be required: 

• Business registration documents 
• Tax certificates/registration 
• Licenses or permits, if any are required 
• Proforma Invoice that clearly states all the details of the shipment 

Choice of Bank 

When using an LC, for international trade settlements, it is crucial to choose a reputed, tech-savvy international bank that specializes in trade finance, such as Euro Exim Bank. This will ensure speed and reliability. Also, if your business is based in a jurisdiction with excessive regulatory controls, an international bank can help you transact with more ease.

The first major trade deal, post-Brexit, has been signed. The new trade agreement, between the UK and Australia, will see the two economies transacting freely with each other. UK sectors such as vehicle manufacturing, whiskey, and biscuits are likely to benefit heavily, while Australia will enjoy free access to the UK’s food market, with no tariffs or limits, making it very lucrative for Australian food producers. The UK too will gain access to Australia’s markets and British citizens will be able to live and work more freely in Australia.  

Overall, the deal appears to be mutually beneficial. For Australia, it may also help to ease some of the pressure the country is under as a result of tensions with China. For over a year now, Australia’s main exports to China have been subjected to various tariffs and restrictions; wine, beef, barley, and coal have all been affected. The deal will also pave the way for the UK to join wider trade agreements in the Asia Pacific region.  

What Could Go Wrong? 

While the deal is mutually beneficial, the UK’s farming industry could end up being negatively impacted. Challenges may emerge when UK farmers have to compete with Australian products. Costs and thus prices of farm products in the UK are high, while Australia enjoys lower costs and major economies of scale; 8 of the 10 largest farms in the world are in Australia. Some members of the UK National Farmers Union believe that this new trade deal will seal the fate of small family farms, sending them into steep decline.  

Some concerns have also been raised within the UK with regard to Australia’s relatively lower food and animal welfare standards. For example, hormone-injected beef is banned in the EU, so pre-Brexit, Australian suppliers had to meet this requirement. However, now that may no longer be the case.    

On the flip side though, sectors catering to Australia’s main imports from the UK will flourish. These include cars, medicines, and alcoholic beverages, and employ over 3.5 million people in Britain. Thus, these areas of the economy can expect to see new opportunities emerge. Regardless, as this trade deal is likely to set the tone for future post-Brexit agreements, one thing is clear; there will be winners and there will be losers in Britain’s post-Brexit economy.