A Letter of Credit or L/C is a written instrument issued by a bank at the request of its customer or the Importer (the Buyer).
The Bank promises to pay the Exporter (the Seller or it is also called the Beneficiary) for goods or services, provided that the Exporter presents all documents called for, exactly as stipulated in the L/C and meet all other terms and conditions set out in the L/C.
The advantages of using L/C:
- The risk of payment relies upon the creditworthiness of the Issuing Bank and the political risk of the Issuing Bank’s domicile, and not the creditworthiness of the Importer/the Buyer.
- The Exporter agrees in advance to all requirements for payment under the L/C. If the L/C is not issued as agreed, the Exporter is not obligated to ship the goods.
Letters of Credit can provide you security and convenience when you are concerned with the risks entailed with buying or selling goods and services abroad. At the GBC International Bank, we can provide you with a variety of Letters of Credit, tailored for your specific needs:
- Import Letters of Credit
- Export Letters of Credit
- Standby Letters of Credit
- Transferable Letters of Credit
Import Letters of Credit
An import letter of credit is a legally binding document that minimizes financial risks to your business. It is a commercial L/C established for a buyer, the importer, to pay a specified sum of money to the overseas seller for the goods described in the L/C.
Before the payment can be made, the seller must present the bank shipping documents and the documents of the supply of goods described in the L/C. Import Letters of Credit help both importers and exporters by providing greater control over transactions.
When GBC International Bank issues the L/C, we guarantee payment to the overseas supplier as long as they comply with the terms of the L/C. This allows you to sustain and support your overseas suppliers, which is a vital component of your company's financial development.
You specify what documentary conditions must be met in the L/C contract before GBC International Bank is authorized to make payment to your Seller. Usually, these include proof of shipment with the latest shipping date and description of the merchandise.
Export Letters of Credit
Export Letters of Credit ensure that an exporter will receive payment from its overseas customer. This is achieved by the exporter requiring an L/C from their customer's bank, which substitutes its credit standing for that of the Buyer. This minimizes the risk of non-payment due to political or financial circumstances.
This L/C would name GBC International Bank as the Advising Bank, whose function is to authenticate the L/C, verify and inform you that L/C has been issued. However, authentication does not mean that the Advising Bank assumes any obligation for payment. The L/C should be issued in an openly negotiable form to permit GBC International Bank to process your documents.
Enhanced protection is one more advantage of requesting GBC International Bank to confirm the L/C in addition to authentication. In providing confirmation, GBC International Bank essentially replaces the credit risk of the foreign bank with its creditworthiness.
This means that in the event of a payment default by the Issuing Bank or the country, GBC International Bank would make the payment as long as the terms of the L/C were met.
GBC International Bank's streamlined processing protocols mean more expeditious payment processes. Upon shipment of your product, forward the required paperwork such as bills of lading, insurance certificates, and invoices as specified in the L/C to GBC International Bank, where they will be reviewed for any inconsistencies. We will then forward the appropriate paperwork to the Issuing Bank and obtain payment for you.
Some L/Cs require time drafts. Once accepted, time drafts represent an unconditional guarantee of payment at a future date by the accepting bank. Should your L/C contain a time draft, we will arrange to get the draft accepted by the Receiving Bank.
GBC International Bank is able to confirm a wide variety of foreign banks' L/Cs at very affordable rates, even in higher-risk emerging markets.
Standby Letters of Credit
A GBC International Bank Standby Letter of Credit functions as an assurance that an applicant will carry out the obligations affirmed within a contract.
A standby letter of credit "stands by" in case you are unable to live up to an obligation using your original means of payment. If the standby L/C guarantees performance, such as the delivery of certain services or goods within a specified period, it is often referred to as a performance L/C. Should your buyer provide documentation, which confirms that you did not meet the terms of the underlying contract, the performance L/C requires GBC International Bank to pay a specified amount to your buyer. In essence, a performance L/C substitutes GBC International Bank's creditworthiness for your own.
There are several types of standby L/Cs, including:
Bid
This type of standby L/C guarantees you will honor the bid you have won and proceed to contract with the buyer. On average, a bid standby L/C is 5% of the estimated contract value.
Advance Payment
When a buyer submits a down payment in advance on a project, they may require this type of L/C. Should you be unable to fulfill the terms of the contract, the advance payment standby allows the buyer to make a draw under the advance payment standby L/C, usually equal to 100% of the down payment.
Performance
This type of L/C guarantees the provision of particular goods or services, within a specified time-frame under the contract.
Warranty/Maintenance
Buyers of capital equipment often require guarantees that the equipment will operate in a specified manner, within a specified time-frame. This L/C guarantees that you will honor the obligations of the contract.
Bank Guarantees
Most U.S. banks cannot issue bank guarantees on behalf of their clients, due to federal regulations. However, GBC International Bank can issue a standby L/C to a bank in a foreign country, which provides collateral for the local bank to convince them to issue a local guarantee to your buyer. This L/C is similar to that of a bank guarantee in that GBC International Bank's creditworthiness is substituted for your own.
Transferable Letters of Credit
A Transferable L/C is used when the beneficiary of an L/C is not the actual supplier of the goods, but a mediator. A Transferable L/C is a regular Letter of Credit with an added provision that permits a designated bank to transfer the sum specified by the L/C to one or more of the official suppliers. This transfer is completed at the request of the original beneficiary of the L/C.
If you act as a purchasing agent for an overseas buyer or source your imports through your agents in other countries, with a Transferable Letter of Credit you could save time and resources in the process.
If you have business contacts in different countries, facilitating two-way trade transactions between importers and exporters, then you may want to consider a Transferable Letter of Credit. GBC International Bank trade specialists can customize your international trade transactions to suit your company's specifications.