International Trade Finance Solutions
What is Letter of Credit
A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.
Discounting of Letter of credit:
It often happens that a seller is in need to seek the payment in advance and the buyer is not able to offer the same. Hence to work around a solution, facilitator offers the facility to negotiate the amount to the seller at a discounted price or in simple terms giving the option of payment in advance to the Seller. This helps both the Seller and the buyer to fulfil their agreed needs.
What is a ‘Standby Letter of Credit – SBLC
A standby letter of credit (SBLC) is a guarantee of payment issued by a bank on behalf of a client that is used as “payment of last resort” should the client fail to fulfil a contractual commitment with a third party. Standby letters of credit are created as a sign of good faith in business transactions and are proof of a buyer’s credit quality and repayment abilities. The bank issuing the SBLC performs brief underwriting duties to ensure the credit quality of the party seeking the letter of credit, then sends notification to the bank of the party requesting the letter of credit (typically a seller or creditor).
Discounting / Lending against SBLC:
The SBLC can be discounted or the funds can be lent against the guarantee issued by the bank in the form of SBLC to the concerned party for the specified tenure as described on the SBLC.
LC discounting is helpful to all the parties in the trade.
- the seller gets immediate payment for his sale;
- the buyer receives the goods along with the credit period to pay
- the bank receives a premium from the buyer when he makes the payment to the bank.