#trade finance instruments

[axioscreditbank]

Letter of credit (LC) & Standby Letter of credit (SBLC) are both the most popular, & reliable trade finance instruments used by global importers & exporters in international trade to reduce the risk of payment failure & to ensure financial stability.

A Letter of credit is a primary method of payment, while Standby LC is used when there’s a risk of buyer’s non-performance during a transaction. So, what is the difference between an LC and SBLC? Let’s check out:

Letter of Credit Vs Standby Letter of Credit

Both the letter of credit (LC), and the Standby letter of credit (SBLC) are payment guarantee instruments used in international trade. In this article, we’ve discussed the key differences and usage between LC and SBLC. Take a look:

What is a Letter of Credit?

Under a letter of credit service, the issuing bank guarantees an on-time & full-fledged payment to an exporter on behalf of its client ie. importer for the ordered goods or services. But in the event, if the importer defaults in payment or is unable to fulfill the terms & conditions of the LC contract, then, the issuing bank will compensate the beneficiary ie. the exporter.

Read more: https://www.axioscreditbank.com/blogs/key-differences-between-a-letter-of-credit-standby-lc

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[axioscreditbank]

The mindset you have plays a crucial role in overcoming business failure. It starts with a willingness to adapt and a flexible, upbeat attitude. Whether or not failure inevitably leads to success depends on how we handle it.

People tend to strike the most evident immediate issues with vigour and unreservedness. That makes sense and may even be wise from a business perspective. It is also a good idea to take a step back and consider the big picture to determine what is still effective and what may need to change. It is an opportunity to gain a deeper understanding of the size and scope of current issues and your company's business model, including how its weaknesses and strengths are implemented.

Working capital financing from an external source is referred to as trade finance. Companies that export or import goods frequently use this type of short-term credit. Trade finance instruments are put to use here.

It is typically supported by an insurance policy or secured against goods.

What Are The Instruments of Trade Finance?

Supplier Financing

Your brand or retail business is expanding, consumer demand for your goods rises quickly, and exhausted inventory levels are expected shortly.

Despite how well you have grown, you need more cash to place the orders required to meet demand. Your international suppliers require payment before shipment, which increases the financial burden.

A bank loan or Letter of credit might not be available to you, or the amount you receive might need to be more. By offering you and your downstream and upstream partners solutions, trade finance companies can offer a considerably higher export and import finance facility, enabling you to optimize your working capital.

Originally published at https://www.axioscreditbank.com

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[tradersuraj1]

Leading Export Factoring Services in India to Boost International Sales

Export factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (invoices) to a third party (the factor) at a discount. This arrangement provides the business with immediate funds, typically a percentage of the value of the receivables, which can help improve cash flow and mitigate the risks associated with international trade. Export factoring is particularly beneficial for businesses engaged in exporting goods or services to international markets.

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[voxtursa]

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[emeriobanque]

What is a Transferable Letter of Credit?

A Transferable Letter of Credit is a letter of credit facility where the first beneficiary can transfer some or all of the credit to another party, known as the second beneficiary. This type of letter of credit gives the seller/exporter the authority to instruct the bank to pay or make the credit available completely or partly to one or more secondary beneficiaries.

Transferable Letter of Credit Definition

Let’s understand the meaning of Transferable LC in simple words. A transferable letter of credit is a trade finance instrument that allows the first or original beneficiary to transfer some or all the right of payment to another party, which creates a second beneficiary.

The party that initially accepts the transferable letter of credit issued by the importer’s bank is referred to as the first, or primary beneficiary. A transferable LC is often used in international trade transactions to ensure timely payment to the supplier or manufacturer.

Key Takeaways:

1. The ultimate agenda of a transferable Letter of credit is to enable the original or initial beneficiary to transfer the right of payment to another beneficiary which they owe. 2. The first beneficiary is authorized to transfer part or all of the right of payment to a second beneficiary. 3. Since applying for a letter of credit is a much more detailed process and can lead to payment delays and additional fees, issuance of a transferable LC ensures sound cash flow for third-party manufacturers. 4. The parties involved in a transferable letter of credit, in addition to the bank, include the applicant (the buyer of goods/service), the first beneficiary (A retailer or broker), and the second beneficiary (A supplier or manufacturer).

How Does a Transferable Letter of Credit Work?

As we know that a letter of credit is a legal document issued by a bank, guaranteeing that a seller will receive the payment from a buyer on time for delivered goods or services. If the buyer fails to do so, the issuing bank will compensate the seller.

When you apply for a transferable LOC, it should be strictly mentioned as such by the issuing bank. By obtaining a transferable letter of credit, the first beneficiary is capable of transferring an LC to another, who then is known as the second beneficiary.

Once named as a second beneficiary, it possesses all the same rights as the original does. The original beneficiary then can request the bank to transfer a part or all the credit to the second beneficiary.

This second beneficiary might, for example, be a supplier or manufacturer that the seller is relying on to send the ordered goods to the buyer. In this type of arrangement, the first beneficiary is acting as a sort of middleman between the buyer and the third-party supplier. Thereby, there can be more than one secondary beneficiary.

In an LC agreement, a seller (first beneficiary) has a sale to execute with the buyer but is unable to complete the merchandise order from the manufacturer. By transferring a portion of transferable letters of credit to the manufacturer, ie. third-party supplier, the seller provides them an assurance of payment by leveraging the buyer’s banker’s credit and utilizes this LC to purchase those goods on time.

How to Apply for a Transferable Letter of Credit?

The process of applying for a transferable LOC is almost the same as applying for a loan. Here are a few steps to follow:

Step 1 — Buyer Requests

The buyer/importer must submit an application to its bank with a request to issue a transferable letter of credit in favor of the exporter/seller.

Step 2 — Evaluation By Buyer’s Bank

The bank will then analyze & evaluate the buyer’s credit score and financial stability in the underwriting process. Underwriting is simply a procedure banks conduct to assess how much risk a borrower poses and determine whether to grant them credit or not.

Step 3 — Review By Exporter’s Bank

After the approval, the bank will draft the transferable LC based on the terms & conditions mentioned in the sales agreement. Then it forwards the LC to the exporter’s bank which then further checks for any discrepancies and sends it to the exporter.

Step 4 — Shipment of Goods

After getting the LC, the exporter will then ship the goods to the buyer and submit the necessary documents to its bank.

Step 5 — Exporter’s Bank Forwards The Documents

The exporter’s bank reviews the submitted documents by its client, ie. the exporter to make sure they comply with the terms & conditions of the LC contract. If any errors or discrepancies occur, they get fixed. Once the documents are approved, the exporter’s bank will forward them to the buyer’s bank.

Step 6 — Release of Payment

The buyer’s bank checks the documents thoroughly and checks the delivery of goods with the buyer. If everything seems right, the bank releases payment to the exporter’s bank and later collects the same from the buyer.

Transferable Letter of Credit Vs Confirmed Letter of Credit

A transferable LC is a much more convenient & favorable option for the buyer than a confirmed LC. It’s because the buyer is only required to interact with one bank for a transferable LOC.

While in the case of a Confirmed letter of credit, the buyer must obtain two letters of credit to provide an additional payment guarantee to the seller, with the second one guaranteeing the first one. This type of trade finance instrument is issued in cases where the seller isn’t assured of getting payment from the first bank (buyer’s bank). In such a case, a second bank that the seller is familiar with issues an LC to support the first one.

Transferable Letter of Credit Vs Back-to-Back Letter of Credit

A Back-to-Back Letter of Credit involves the issuance of two letters of credit to finance a single transaction when a middleman is involved between the buyer and seller, such as a retailer or broker. It enables the first beneficiary to transfer the original LC as a payment security in favor of the second beneficiary, ie. the supplier.

But a Back-to-Back LC is a bit different from a transferable letter of credit. Here, Instead of issuing an LC to the supplier, the first beneficiary requests the buyer to issue a transferable LC in favor of the second beneficiary.

Transferable Letter of Credit Vs Non-Transferable Letter of Credit

An LC can be transferable or non-transferable. If a bank issues a transferable LC, the word “Transferable” is mentioned on it. In the absence of such a word, an LC is deemed to be a non-transferable LC.

A transferable LC is often used in international trade transactions to provide timely payment assurance to the supplier or manufacturer. Letters of credit are an important trade finance tool in business transactions between buyers and sellers, especially if the parties reside in different nations or there is a lack of trust. Transferable letters assure both the sellers and their suppliers that they will be paid for their goods & services.

Originally published at https://www.emeriobanque.com.