Letter of credit is a buyer’s bank obligation to pay the beneficiary at the expense of the applicant the amount in agreed currency on the assumption of the beneficiary’s grant of papers at a stated time, which correspond with the LCs conditions, and execution of other conditions specified in the LCs.
LCs use in foreign-trade activity is recommended in case of:
- lack of information about a partners’ reputation when advanced payments, open account payments or collections seem to be too risky for one of the counterparties;
- need in additional sureties in the form of a third party (bank) involvement;
- an unstable economic and/or political situation in the buyer’s country and FX risk and other risks in the seller’s country.
Advantages of an LC:
- LC is a very flexible instrument, which may be used as a payment tool in different types of transactions;
- rules of LCs usage are determined by the competent international institution, are common, and are accepted all over the world. This is an advantage for both customers and banks, as each party of the transaction has a clear understanding of their rights and obligations, as well as standard requirements to all participants of the transaction;
- LC is convenient as an instrument of a short-term loan.
Advantages for importers:
- payment under an LC can be executed at the expense of customer’s own funds, bank loans, or from other securities of the customer (i.e. deposits, etc);
- payment is made after goods are shipped and documents presented;
- importer defines the list of documents which a payment is to be realized against;
- limited terms of document presentation and goods shipment .
Advantages for exporters:
- in addition to the buyer’s obligation to make their payment, there are bank’s obligations on LCs; the bank’s obligation is independent of the relationship between the seller and the buyer;
- if an LC is confirmed, there are guarantees of payment from a second bank;
- fulfilment of LC’s conditions is a guarantee of payment.
Advantages of Priorbank’s LCs:
- long term experience of working with the product: more than 1200 LCs have been opened since 2003;
- well-known name in the international banking and financial sphere, as well as RZB-Group’s experience;
- wide network of bank’s branches, as well as a competitive price of the product;
- experienced and competent staff;
- covering of LC may be used as a deposit with an interest calculation.
When is an LC needed?
We recommend you to use LCs if you have an external economic transaction to the amount of more than 100,000 EUR and which meets one of the following criteria:
- new supplier or buyer;
- prepayment for delivery items is necessary;
- high risk of buyer's insolvency;
- high risk of seller’s non-fulfilment of obligations;
- maintenance of established conditions regarding quality, terms and similar requirements.