What is a Commercial Letter of Credit?
A commercial letter of credit (or sometimes referred to as import/export letters of credit) is one of the oldest and most standard forms of payment for transactions in international trade. Global importers and exporters can often feel uncomfortable producing and and shipping goods without any assurance of payment; especially if this the first time of dealing with each other. Both importers and exporters can come to an agreement that helps protect both interests whether it is to receive money or goods in exchange. Commercial letters of credit is an agreement in which the importers bank guarantees to pay the exporters bank at the time goods/services are delivered.
How Do LC’s Differ from SBLC
Commercial letters of credit differs from Standby letters of credit (SBLC) as they are primarily used in straightforward transactions. Eg; LC’s are used in primary instrument of payment whereas SBLC’s are used as a secondary back up method of payment.
The major difference between a Commercial LC and a Standby Letter of Credit is that a Commercial Letter of Credit (for Import or Export) is a payment method for a trade transaction whereas an SBLC supports the payment of a debt, which debt may or may not be trade related.
Commercial Letter Of Credit For Importers
Importers may need to delay payments of manufactured products until their batch of goods have been distributed and sold. This is common in supply chains when a business is dependant on a number of processes happening to keep cash flow/liquidity on their accounts. Importers may choose to use a commercial letter of credit to show their credit worthiness to the exporter. Also, they can ensure payment for the provision of goods against invoices or other documentation within a specified time frame. Without a commercial letter of credit, exporters generally ask for substantial deposits or other payment guarantees. Importers can also choose to use documentary letters of credit (DLC) whilst trading internationally. This means they are protected by financial loss if goods are not produced according to the documented specifications.
Commercial letters of credit represent a reasonable compromise that protects the exporters of missed payment for the shipment of goods. An LC can be used to demonstrate that goods won’t be released until they are paid for. They can provide importers with a guarantee that they will get the goods if the exporter is paid. Exporters can agree to terms according to the documentary requirements that in turn protect importers’ interests.
Unsecured Letters Of Credit
Most letters of credit are secured against collateral. Prestige has teamed up with an organisation who can offer unsecured letters of credit. This means businesses do not have to tie up valuable collateral to open a letter of credit.