What is a Letter of Credit?
Also commonly known as a Documentary Credit, a Letter of Credit (often abbreviated to just L/C) is a type of international trade payment means of getting paid by your customers. In short, it is a guarantee of payment given by a bank that says if you satisfy the terms, conditions and documentary requirements set out in the Letter of Credit, you will be paid the agreed amount. You may also see it referred to as an ‘irrevocable’ L/C. All Letters of Credit that are established now are irrevocable, as revocable L/Cs are no longer used.
Why is a Letter of Credit used as a method of payment?
It’s because of the security of the payment. Short of being paid in full in advance, it’s the next best method in guaranteeing you will be paid for your goods or services. For example, it’s a particularly attractive option when you have a high-value order from a customer that you have had no previous international trade relationship with. Also, in certain countries, payment by Letter of Credit is mandatory so there is no other option.
How can I arrange to be paid by a Letter of Credit?
The first step is to agree with your customer that payment will be made by Letter of Credit. It is important to establish this from the outset, so the associated costs involved can be built into the sales contract if necessary. The actual L/C process then starts when your customer applies for a Letter of Credit through their chosen bank. The L/C then passes on to a UK correspondent bank to be advised on to you.
What are the Letter of Credit Costs?
It is very hard to put a figure on this, as different banks charge different amounts for doing different things! At a very minimum, there are Advising charges (from the UK bank that advises the L/C on to you) and Negotiating charges (from the bank who you submit your documentary presentation too). If the L/C is confirmed, whereby the guarantee of payment transfers to a UK bank, this also incurs extra charges. Discrepancy charges (the penalty imposed for presenting any non-compliant documents) can also vary quite significantly from bank to bank. Whether the buyer or seller pays these charges can also be defined in the terms of the Letter of Credit.
How can Access To Export help me manage the Letter of Credit process?
We have collectively managed and produced documentation for in excess of a thousand Letters of Credit over the years and have gained a wealth of experience when it comes to ensuring their smooth and efficient processing. By combining the management with the actual practical task of document production, we are able to make sure the terms of the L/C are adhered to. Our preference is always to be involved from the outset, to ensure an L/C is set up correctly in the first place so amendments (and their associated charges) are not necessary.
The big question – how much will it cost you for us to manage your Letter of Credit? We don’t base our fees necessarily on the value of the Letter of Credit – there can be more work involved in managing and document preparation for a £2,000 Letter of Credit than one with a value of £2,000,000! We look at it on a case by case basis but our full Letter of Credit management services are available from as little as £350+VAT. We are always happy to discuss, obligation free, the options and prices involved at any time.
In summary…
The above is designed to give as simpler overview as possible on Letters of Credit, most notably in international trade situations. The honest reality is that Letters of Credit can be challenging and complex and the financial penalties involved when mistakes are made during the process makes them daunting and off-putting.
They shouldn’t be. They just need to be set up and managed correctly.
Letters of Credit are a payment tool that opens up your exporting opportunities and accesses new markets to sell your products and services in to. With Access To Export managing your Letters of Credit, you can be confident in the knowledge that the process will be managed correctly, accurately, and more importantly, compliant documentation will be presented and the moment when the funds become available with be reached as quickly and efficiently as possible.
After that, it’s on to the next order!…
Get in touch to discuss your letter of credit requirements