Export Letter of Credit
When exporters(sellers) receive the import letter of credit from importers(buyer’s) bank it becomes an Export Letter of Credit. So both Letters of Credit are significantly same, only their perspective is different. They are the most common and versatile trade finance methods used to finance exports. It reduces the risk of credit as the issuing bank makes the payment even if the importer is not able to do so. As Export Letter of Credit can be modified to the needs of the exporter, it provides flexibility in terms and conditions as far as they are genuine and fair. It enables the exporter to receive the payment before the shipment reaches the importer by submitting the documents as proof, thus improving the exporter’s cash flow.
This service offers an assurance of payment for export shipments based on the presentation of documents that comply with the Letter of Credit.
This facility facilitates international trade transactions. Since the buyer is in a different country, the exporter is assured of payment once the goods are shipped, against the presentation of shipping documents per the LC terms.
This also facilitates the exporter to raise easy finance from his banker for the manufacture of goods as the LC is irrevocable and backed by the undertaking by the issuing bank to pay against the presentation of documents per the LC terms and compliance with other conditions per the LC.
- Irrevocable letters of credit cannot be canceled or changed without the consent of all parties involved (importer, exporter, and the issuing bank)
- Foreign issuing bank and country risk can be mitigated via confirmation of the letter of credit
- May be payable upon presentation of certain documents (sight) or at a future date after documents have been accepted under the letter of credit (term or usance)
- The letter of credit should be consistent with the terms and conditions stipulated in the commercial contract.
- Payment is guaranteed by the Importer’s bank before shipment
- Under a letter of credit, the exporter relies upon the creditworthiness of the issuing bank and not that of the importer
- The conditional nature of the payment guarantee provides the Exporter with control in securing the funds
- Exporters may offer extended payment terms if payment is through a letter of credit
- LCs can eliminate an Exporter’s risk of non-payments a result of default by the Buyer
- LCs can provide access to post-shipment non-recourse financing
- LCs reduce the need for a credit control function
- LCs provide certainty concerning the payment date (facilitating booking ForwardContract to cover any foreign currency exposures).