Letter of Credit

What is a Letter of Credit?

A letter of credit is a letter from a bank that provides important guarantees. It can help businesses to trade internationally, whether you’re the business who’s importing or exporting the goods.

For businesses exporting, the risk is that you will send goods but never receive payment from the customer. A letter of credit provides you with a bank guarantee that you will be paid in the event your customer is unable to settle the debt.

Importers, meanwhile, may fear that they will send payment for goods they never receive. A letter of credit means they benefit from knowing they will receive the goods ordered before having to pay.

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What are the benefits of a letter of credit?

Exporters gain peace of mind that they will be paid for their service, even if their customer goes out of business
Importers know they won’t have to pay if the supplier fails to fulfil the order on time, and could negotiate a better price
Letters of credit enable businesses to trade in confidence with businesses in overseas markets they may not be familiar with
A bank letter of credit is an internationally recognised, secure method of settlement
They can also help the exporter to secure an invoice finance facility, to bridge the cash flow gap arising from trading on credit terms

Types of letter of credit

There are several types of letter of credit, designed to provide varying levels of security and cater to different needs. Some of the more popular types are:

Irrevocable and Revocable

If a letter of credit is revocable, it can be cancelled or changed by the bank that issued it. If it is irrevocable, it cannot be changed unless all parties involved agree, meaning it provides more security.

Confirmed and Unconfirmed

When a letter of credit is issued, the seller may wish to have it checked by a bank in their own country. The seller may ask the bank that checks it to ‘confirm’ it or provide a secondary guarantee of payment in the event the first bank fails to make it.

Transferable

If a letter of credit is transferable, it can be passed to another beneficiary, which can be useful if intermediaries are involved in the transaction.

Standby

A standby letter of credit provides an assurance a buyer is able to pay but is used when the seller doesn’t expect to have to use it.

Revolving

A revolving letter of credit is able to cover multiple transactions between the same two parties.

Back-to-Back

In the event that intermediaries are involved but a transferable letter of credit is unsuitable, back-to-back letters of credit can be used.

How can I secure a letter of credit?

Whether your supplier has asked for you to set up a letter of credit or you would like your customer to do so, Hilton-Baird Financial Solutions can help guide you through the process.

As an experienced commercial finance broker, we’ll introduce the most appropriate providers based on your specific requirements. We can also help you with other methods of trade finance, designed to reduce the risks of working with international suppliers and clients.

To find out more about how we can help, call us on 0800 9774833 or email info@hiltonbaird.co.uk.