Letters
of Credit & Import/Export Finance
The
primary financial tool used in most import/export transactions is
the Letter of Credit.
Do
you buy or sell goods internationally? Are you a small
or new business selling to large firms? You likely need
Letters of Credit or import/export financing services such as
Purchase Order Financing and Invoice/Contract Financing. We
can help you with the following financial instruments and tools,
which may be required or helpful in completing your international
transactions.
There are many different types of Letter of Credit that may be
used depending on the specifics of the transaction and the parties
involved. The following is an overview of High Falls' Letter
of Credit solutions.
What
is a Letter of Credit?
Letters
of Credit are commonly used to reduce credit risk to sellers in
both domestic and international sales arrangements. By having a
bank issue a letter of credit, in essence, one may be substituting
the bank's credit worthiness for that of the customer.
Letters of Credit are also used domestically when dealing with a
small or new business.
Why
use a Letter of Credit?
International
trade laws sound good and look good on paper, but are often
difficult to enforce when dealing with a foreign party. So
most international transactions are secured using a financial tool
known as a Letter of Credit.
A Letter of Credit may be required in cases when a party does not
have sufficient financial history, assets, or credit to support
good faith credit terms. This is often the case with startup
or growing companies.
Two
Basic Types of Letter of Credit:
Documentary
Letter of Credit can be either
Revocable or Irrevocable, although Revocable is extremely rare.
Irrevocable letters of credit can be Confirmed or Not Confirmed.
Each type of credit has advantages and disadvantages for the buyer
and for the seller. Charges for each type will also vary.
However, the more the risk by guaranteeing payment, the more the
charge will likely be for providing the service. Documentary
Letters of Credit are the most common, are used on an individual
transaction, order, or invoice basis, and generally have specific
conditions applied to them.
Standby
Letter of Credit
is a
payment or performance guarantee used primarily in the United
States. They are often called non-performing letters of credit
because they are only used as a backup should the buyer fail to
pay as agreed. Thus, a stand-by letter of credit allows the
customer to establish a rapport with the seller by showing that it
can fulfill its payment commitments. Standby letters of credit are
used, for example, to guarantee repayment of loans, to ensure
fulfillment of a contract, and to secure payment for goods
delivered by third parties. The beneficiary to a standby letter of
credit can cash it on demand. Stand-by letters of credit are
generally less complicated and involve far less documentation
requirements than irrevocable letters of credit.
Contact
us to
discuss your situation and how this option can be used.
Click here for more on Standby
LOCs.
How
does a Letter of Credit Work?
A
Letter of Credit is a document typically issued by a credit worthy
financial institution guaranteeing that your supplier will be
paid upon delivery of your raw materials, or to guarantee payment
when you sell goods to a foreign customer. Here's how it
works in both instances.
Importing
using a Letter of Credit:
An importer obtains a purchase order from the end buyer. High
Falls Funding (or its agent) issues a Letter of Credit to the
overseas seller. When the goods arrive they are manufactured to
completion and/or delivered to the buyer and High Falls Funding
forwards the invoices to the end buyer. When payment is received
by High Falls Funding, all expenses incurred are deducted and the
balance is immediately forwarded to the importer.
Exporting
using a Letter of Credit:
An exporter obtains a Letter of Credit from the foreign buyer. The
exporter assigns the Letter of Credit to High Falls Funding (or
its agent), or the Letter of Credit is issued directly in favor of
High Falls Funding. We finance the purchase of ordered goods and
the exporter ships to the overseas buyer. High Falls Funding
negotiates the Letter of Credit. When the buyer’s bank makes
payment, High Falls Funding deducts all expenses incurred and the
balance is forwarded to the exporter.
Note:
The Letter of Credit transactions described above are Documentary
and Irrevocable, and work, in the case of a foreign supplier, if
your supplier grants you credit terms that are at least as long as
the credit terms you provide to your customer in addition to the
time it takes to build your product and ship it to your
customer. The Letter of Credit is simply a guarantee that
your supplier will get paid according to the terms of sale - it is
not financing.
Other
Types of Letters of Credit we can offer for appropriate
situations:
-
Documentary
Revocable Letter of Credit
-
Documentary
Irrevocable Letter of Credit (Confirmed or Un-Confirmed)
-
Standby
Letter of Credit
-
Special
Letters of Credit
|
-
Back-to-Back
Letters of Credit
-
Deferred
Payment (Usance) Letters of Credit
-
Red
Clause Letter of Credit
-
Revolving
Letter of Credit
-
Transferable
Letter of Credit
|
Want
more information about Letters of Credit? See the
following information links, compliments of the Credit Research
Foundation, a non-profit organization.
Understanding
and Using Letters of Credit, Part I
Understanding
and Using Letters of Credit, Part II
Sample
Procedure for Letter of Credit Administration
Beware:
There are many Letter of Credit scams going around.
These scams usually involve the selling, discounting, or hypothecating
Standby Letters of Credit. Legitimate LOCs are not intended
to be investment instruments and there is no established market
for trading them. Although an active Letter of Credit, depending
its terms and conditions, can usually be discounted or forfeited
(the financial equivalent to factoring) for quicker access to
funds, this is not a procedure to be embarked upon by the
inexperienced. A Letter of Credit may be written for a
short period of time,
covering one shipment of goods, or may be written for a greater
amount and for a longer period of time in order to cover say, a
year's worth of shipments. But legitimate LOCs never
carry the term "one year and one day" which is a
meaningless term created by fraudsters.
Educate
yourself before getting involved in the trading of any Letter of
Credit and verify all terms and conditions, parties involved, and
the nature of the investment with an independent party. See Fraudaid.com,
the FBI
web site,
or for more LOC scam info, or contact
us and we would be happy to discuss any Letter of Credit
transaction.
Fraudsters
or those dealing in Letter of Credit Scams beware, we contact the
US Treasury Department when such scams are made aware to us.
Please do not contact us with any such fraudulent schemes.
Need
fast cash for your active Letter of Credit? High Falls
Funding can discount or forfeit certain types of Letters of Credit
for fast cash. Contact us to discuss.
Do
your suppliers require COD payment, but your customers demand
payment terms? Consider our
Purchase
Order Financing
service.
