Letters of Credit (L/C)
L/C's have been the cornerstone of trade finance since the middle of the last century. An irrevocable L/C provides an undertaking from your customers bank that you will be paid if you present documents in accordance with the terms laid down in the Letter of Credit. L/C' can be structured to handle most types of transactions where there is concern about the customers ability or willingness to pay. However, L/C charges can be expensive and I would generally not recommend the L/C method for transactions with a value less than £6,000.
With little formality you can raise post shipment finance on the back of a Letter of Credit, particularly if it has been confirmed by a local bank.
Such finance is off balance sheet and outside your banking facilities. Finance under confirmed L/C's is also without recourse.
I am also glad to advise that some Irish bank's are now prepared to consider pre-shipment finance for contracts secured by L/C's. Exporters often wonder why banks are slow to provide this type of finance. If the exporter gets a well structured L/C and if the exporter has the necessary expertise and experience in handling the shipping and most importantly the documentation there is very little risk. However, if a bank is dealing with an inexperienced company the risk increases dramatically.
This material has been provided courtesy
of Obrico Ltd Global Trade & Finance.
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