| BUSINESS FINANCE PROBLEMS AND SOLUTIONS. |
| Greetings!
You may have gotten the impression by now that we deal with Letters of Credit in all shapes and sizes. It’s true. One particular type of LC we do a lot of work in is a niche product but very useful in some industries. We’re referring to a documentary letter of credit which can be issued without collateral. Issuers of such letters of credit structure the LC in a way to manage their own capital risk and hold the shipment as collateral pending payment by the client needing the LC.This type of LC is useful to importers who may not want to draw down their bank lines for the month or two it takes for the supplier to get ready to ship the goods, but who are able to pay for the shipment when it is on the water. It’s commonly used in the garment industry and is easily accepted in many spots in Southeast Asia, and often for CONSUMER PRODUCTS. Our Indian clients may recognize this by another name, as it is sometimes called an accommodation letter of credit. |
We perform a number of tasks related to letters of credit. Last month we assisted a client in getting paid immediately against a Documentary Letter of Credit that was due to have funds released four months after the necessary documents were presented. In the industry that’s called a usance LC. (When dictated into the phone, it came up “useless Elsie”. There are still a few bugs in voice recognition).The issuing bank was in a non-European country with Mediterranean beaches and the client was here in the US. To complicate things further our client was providing services, not goods, to his Middle East customer and the letter of credit was to pay for those services.We and our partners made certain the correct documents were required in the letter of credit to satisfy LC requirements so that the bank could advance the money. This is trickier than you might think; banks are a lot more comfortable with LC’s related to goods rather than services.After that part, the last bit was much easier: getting the client paid immediately (at sight, in LC parlance), even though the LC specified payment in four months from date of document submission. As it happens, the interbank rates in such cases are usually much less than normal bank interest charges to customers, so the customer saved money here too when those lower charges were passed through by the bank.
