Advantages of a letter of credit as a documentary payment instrument are as follows
- Possibility to fully or partially eliminate advance payment with its drawbacks;
- Possibility of applying a reliable payment instrument, regulated by international rules and securing payment release by the bank instead of the importer;
- The exporter can be sure of proper fulfillment of the conditions of a Letter of Credit, in securing timely payment;
- The importer has the possibility to not pay until the relevant documents confirm that the cargo is on its way to the importer or is received by it;
- Possibility to extend the advance payment period without breaching the payment time established by the law;
- Possibility to use the advantages of financing international trade contracts, being less expensive than traditional crediting of an operation.
Thus, using Letters of Credit is probably the best mechanism for financing enterprises and companies. A Letter of Credit gives certain guarantees to the Buyer and to the Seller, as the cash obtained may be used only for a strictly agreed payment.
One of the advantages of work with our company and our partners is that specialists of our partners (Provider companies) prepare the wording of the payment provisions of the contract for clients, develop a draft Letter of Credit – i.e. do all the work for the client. For a company, being our client all that remains is to sign the documents and to pay the cost of issuing a financial instrument on time. To reduce the risks, our specialists will scrupulously study the potential client’s activity, the subject of a transaction, and the documentation provided to our company for signing a foreign trade contract and further execution of the transaction. It is obligatory that each transaction is studied by specialists of the documentary operations department for fraudulent schemes as well as those aimed at financing terrorism. If necessary, additional rules and provisions are incorporated into a foreign trade contract, providing a higher level of comfort to our company clients.
The international network of the group of our company’s partners allows to quickly verify the solvency of any of the 2 thousand financial institutions on all continents, and also to use the group’s internal limits on issuing and confirmation of Letters of Credit and Letters of Guarantee.
Documentary operations are a very complicated and specific instrument. Therefore it would be difficult for a Client to understand all the peculiarities on its own, especially if these are operations counted for several years. Receiving a Client’s enquiry, our company specialists clarify the volume of transactions, timing, purchase/sales, banks in which trading partners have accounts, and after that we advise on the most acceptable accounts settlement schemes with use of documentary operations, determine and agree changes to be made into the contract between the Buyer and the Seller, and agree how to proceed with further activities.
When working with our company, the Client has the possibility to determine the overall cost of a transaction taking account all possible commissions and payments: for instance, for checking, receiving and sending documents, consultant’s fee, cost of sending notices via SWIFT, change of the conditions of documentary instruments etc.
It is also necessary to note that the more demanding a financial institution is (in particular, the group of companies being our partners), the higher its reliability guarantee is. Day after day, the number of fraud cases in documentary operations increases, and their consequences have extremely negative impact both for financial institutions and Clients. That is why our company has a sufficiently strict policy of selecting client enquiries for obtaining funds via application of documentary operations.
Our company has high expectations for the implementation of documentary instruments on the retail market. The Letter of Credit payment form is much more complicated than usual non-cash and cash payments, but it may appear beneficial in cases of accounts settlement between legal and physical entities, as well as between physical entities, especially when large sums and payments are involved. Therefore it would be reasonable here to give an example of accounts settlement using a documentary Letter of Credit:
1. At first, the Seller and the Buyer sign a contract stipulating payment under a Letter of Credit.
2. Then the Buyer applies to our company for further assistance in issuing a Letter of Credit in favour of the Seller.
3. Financial institution – partner of the Provider (assets holder) company issues the Letter of Credit and sends it to the Seller’s financial institution.
4. Under the conditions of the received Letter of Credit, the Seller sends the cargo to the Buyer and provides the documents indicated in the Letter of Credit, to its financial institution.
5. The Seller’s financial institution sends the documents to the Buyer’s financial institution (issuer of the Letter of Credit). The latter reviews the documents and if they comply with the conditions of the Letter of Credit, releases costs from the Buyer’s account and releases these documents to the Buyer. After that, the Buyer acquires the rights to the cargo, and the financial institution issuing the Letter of Credit transfers funds into the Seller’s financial institution, which transfers them directly to the Seller’s account.