IMM Letter of Credit: International Trade Finance using the appropriate LC for your Credit Enhancement needs.
A LC is available to our clients in conjunction with our Purchase Order and Accounts Receivable Factoring Facilities. In order for a LC to be issued, there must be a Purchase Order and the LC is a payment guarantee to the seller of the product and once the product has been delivered, the order then becomes a receivable to the company as part of the natural sales cycle. To be clear, a Letter of Credit will not be issued without being part of a Purchase Order transaction.
We can open Letters of Credit to facilitate small or large Purchase Orders for Inventory Financing to augment our Purchase Order Financing Programs in addition to augmenting the banking abilities that you have.
Letters of credit are generally are generally fall into one of two classifications.
1. Standby Letters of Credit (SBLC) – Which provide a “guarantee” from a bank on behalf of a third party in the event of default or non-payment on the part of the payee (creditor).
2. Documentary Letters of Credit (DLC) – Which generally are used for import and export to conduct business between companies in different countries.
Letter of Credit or LC | SLBC | DLC | Bank Guarantee or BG | Performance Guarantee
Letters of Credit, Performance Guarantees and other types of Trade Instruments are created using our wide-ranging Global Banking Partners. If your Company needs Letters of Credit, complete the form below and we will respond to you quickly.
A Letter of Credit is a payment guarantee that is issued from a bank to another bank to guaranteed payment for some transaction.
When this happens, the issuing bank is responsible to pay the invoice which is guaranteed should the company that is supposed to pay the invoice, defaults on the payment.
Where IMMFinancial.com is involved in the transaction, it is our bank that issues a Letter of Credit, which IMMFinancial.com is responsible for.
As you can imagine, for this to happen, there need to be several things in place for the Bank Guarantee to be issued.
At the end of it all, there needs to be sufficient assurances in place so that the bank and IMMFinancial.com as the facilitator, will be comfortable to provide this guarantee to another company and financial institution.
So how can there be sufficient assurance that the party that is responsible to pay the invoice CAN AND WILL pay the invoice when do so the IMMFinancial.com will use its resources to guarantee this payment?
There are actually a few ways this can be done but at the end of it all, it MUST be proven that the company that we are issuing the LC on behalf of, does have the financial capacity to pay the invoice when due.
This verification part of the process can get fairly complicated but the issuance of a LC is fairly simple.
LC Verification Methods:
1. Escrowed Funds by the company we are issuing a LC on behalf of.
2. The end buyer has funds Escrowed and are triggered to be released when the end buyer receives and accepts the goods.
3. The transaction is part of a Purchase Order and Factoring Facility where the end buyer has been confirmed as creditworthy and the invoice will be issued upon delivery and acceptance of the goods.
We would need you to complete the PO Application as the transaction will require more information than just the LC application requires. The link to that page is here for your convenience.
At this point, I want to make something abundantly clear. Our Letters of Credit are NOT available for investment programs where they are leveraged to facilitate High-Yield Investment Platforms. If this is what you are looking for, I would suggest you see an article on our website titled “How Financial Instrument Leasing Actually Works”.
The URL of this Article is https://immfinancial.com/financial-instrument-leasing/
Documentary Letter of Credit Questions and Answers
- What is a SBLC?
- Why would someone need to use a Payment Guarantee?
- Are there different types of Documentary Credit?
- How is it determined which type of Letter of Credit is needed?
- How complicated is the process for acquiring Documentary Credit?
- How long does it take to have my Credit Enhancement in place?
- What should I expect to happen once I submit my application?
1. What is a Standby Letter of Credit (SBLC)?
A Standby Letter of Credit is secondary payment or credit enhancement mechanism. A Financial Institution can issue a SBLC for a client to assure the recipient of the Documentary Credit Instrument of their capacity to pay in regards to the payment terms of a contract between the beneficiary and the client that the bank issues the SBLC for.
2. Why would someone need to use a Payment Guarantee?
When companies have their exports increasing, so does the amount they are carrying in their International Accounts Receivable balances. Several Export Companies can be intimidated by the numerous puzzles and potential risks that come along with selling and shipping products to buyers in different countries as well as the foreign banks. Payment Guarantees in the form of Documentary Credit can serve as a Guaranteed Payment.
3. Are there different types of Documentary Credit?
Yes, there are several types that are available. Below is a short description of each type:
- Unconfirmed Sight Credit: The Financial Institution that issues the Sight Credit will assume the Irrevocable Obligation on behalf of the importer (purchaser) for payment (on sight) to the recipient (exporter) subject when they present the required documentation before a predetermined time period as well as the completion of any other requirements as indicated in terms and conditions of sale. This is considered to be a COD or Cash on Delivery sale.
- Confirmed Sight Credit: In this circumstance both banks (issuing and confirming) are liable for payment to the export company as opposed to Unconfirmed where only the issuing bank is liable for payment.
- Unconfirmed Acceptance Credit: In this case it is only the drawee Financial Institution that is liable to the Export Company and causes acceptance for payment date of maturity per the Terms and Conditions of sale. Therefore there is an extended time period where the risk of credit and country are not mitigated.
- Confirmed Acceptance Credit: The Export Company will collect payment when due collectively from issuer and confirmation bank. Both accept the bill of exchange to be drawn upon them.
- Transferable Credits: The Distributor or Middleman (first beneficiary) can have his bank transfer the Credit Instrument (original credit) to the final supplier/producer (second beneficiary) either any portion of the credit they wish (full or in partial).
- Back-to-Back Documentary Credit is created, based on existing credit (original credit) to the benefit of the final supplier/producer.
- Assignment of Documentary Credit: In this circumstance the beneficiary of the Documentary Credit will designate all or a portion of the benefits of the Documentary Credit.
- Unconfirmed Deferred Documentary Credit: In this case it is only the issuing Financial Institution which is liable to the Export Company for remittance when due. Therefore there is an extended time period where the risk of credit and country are not mitigated.
- Confirmed Deferred Documentary Credit: Here the Export Company will be paid from both the issuing and the confirmation Financial Institution.
- Unconfirmed Negotiation Credit: The Export Company is entitled to an advance payment or an agreement to a payment advance from the Negotiating Financial Institution on when they present the required documents. Should the credit not be confirmed, the Negotiating Financial Institution has the ability to seek recourse from the Export Company. Just the issuing Financial Institution is accountable to the Export Company. Credit and country risk are not mitigated.
- Confirmed Negotiation Credit: The Export Company will receive payment from the confirmation Financial Institution for non-recourse negotiations. In this case, the Export Company will have first-class security.
- Standby Letter of Credit (SBLC) has been derived from banking legislation in the United States, which outlaws US Financial Institutions from accepting guarantee obligations via third party issuers.
- Revolving Documentary Credit: Revolving Documentary Credit refers to consignments over a several installments at predetermined times up to a predetermined amount. The amounts are generated in equivalent units to the amount of the initial payment. When used, the credit is automatically renewed consistently by the equivalent amount for a pre-set count of consignments. This is a rare kind Documentary Credit.
- Red/Green-Clause Documentary Credit: The Red-Clause Documentary Credit permits the Export Company is given an advance before presenting of the documents. In this case, he is pre-paid for the goods that are yet to be delivered which he can use to cover costs of production. A Green-Clause Documentary Credit is different from a Red-Clause Documentary Credit because in this case, the product must be in a warehouse prior to disbursements. The Export Company normally is obligated to present proof that the goods are warehoused in addition to the other predetermined documentation.
4. How is it determined which type of LC is needed?
In general, the Financial Institution that will be issuing the Documentary Credit will assist you with know which will suit your needs best, but in the end it is up to the buyer and seller of the goods to accept. The whole reason for the Documentary Credit is for Credit Enhancement. The seller wants to get paid and the buyer does not want to lose their money. Credit Enhancement devices will give these assurances.
5. How complicated is the process for acquiring Documentary Credit?
The process itself is not overly complicated, but it is not cheap either. Depending on the size of the LC you need, the cost could be as much as 2% of the face value of the Financial Instrument that your are seeking per month. You will need to demonstrate your ability to cover the costs of the transaction when you apply. This means you will need to furnish a Proof of Funds such as a current Bank Statement or Bank Comfort Letter. You will need to provide all the details of the transaction including who the receiving bank is and their contact information, what the product is via your sales agreement as well as all other relevant details to the transaction.
6. How long does it take to have my Credit Enhancement in place?
It can be done in as little as 2 weeks from the time the full application has been submitted. This of course will vary depending on the complexity of the transaction. As with everything, do not leave your application until the last moment or you will be setting yourself up for disappointment.
7. What should I expect to happen once I submit my application?
After the application for Documentary Credit has been submitted along with the Proof of Funds you have available for the transaction, one of our Documentary Credit Specialists will contact you to review the information received and to discuss what additional items will be required, if any. The will ask you to verbally walk them through the transaction to see which product will be best for your purposes.
Once this has been determined, you will receive a draft of the Documentary Credit to be reviewed by the recipient party and their bank. Once they accept the Letter of Credit draft, they will be asked to sign off on the verbiage for their acceptance. Once this has happened, a formal agreement will be furnished to you for execution of the LC.
When you sign and accept the agreement, funds will be required to be sent into an escrow account and our Documentary Credit Specialist will have the Letter of Credit issued per the agreement and the accepted draft. After is has been issued, you will receive a copy of the Financial Instrument and the funds that are held in escrow will be released for payment on the LC.