Import Financing/ Letter of Credit
Letter of Credit
Having a letter of credit puts your suppliers at ease. It works the other way too, as you can ensure payments from your trade accounts are only approved after your supplier’s documentation has been checked by the bank or financial institution issuing your letter of credit. These are a few of the most common types of letters of credit:
1) Sight Letter of Credit: This is used when you want the issuing bank to honour the payment at “sight”, i.e. payment will be made once the documentation received is verified and approved.
2) Usance Letter of Credit: This type of letter of credit means that the issuing bank will accept the draft once documentation received is verified, and will also pay on the maturity date
3) Red Clause Letter of Credit: Often used in manufacturing industries, this type of letter of credit authorizes the issuing bank to make partial advance payment to the seller when documentation is received.
4) Transferable Letter of Credit: Frequently used by middleman traders who do not have any credit facilities. The issuing bank will transfer an Export Letter of Credit in favour of the ultimate seller at the middleman’s request. The middleman trader will then sell the goods under the Export Letter of Credit.
5) Back-to-Back Letter of Credit: For middleman traders with a credit facility, the purchasing party’s bank backs the issuance of an Import Letter of Credit, under a master Export Letter of Credit. After that, the revenue from the master Export Letter of Credit is used to pay the bank under the Import Letter of Credit.
6) Standby Letter of Credit: This type of Letter of Credit is commonly used to assure that payment obligations or contractual performances will be fulfilled. Another common option for this trade function is a Banker’s Guarantee.
Trade cycles can deal a heavy blow to your cashflow if your financial planning isn’t optimized. With import financing, you can customise your import financing facility so that it works with your trade cycle and not against it. The issuing bank or financial institution pays for your purchase of goods and supplies first, allowing you to have an improved cashflow.