Export Letter of Credit

Export Letter of Credit Financing For International Trade

Export Letter of Credit financing for international trade is the most common payment method for cross-border trade. Financial instruments issued by banks, export letters of credit guarantee payment to the exporter provided terms and conditions are met.

Export Letters of Credit Overview

Export Letters of Credit are the most common trade finance method used to finance exports. They are versatile, secure and can be used for almost any international trade transaction. Export Letters of Credit are financial instruments issued by banks that represents the commitment of the bank on behalf of an importer that guarantees payment will be made to the beneficiary (exporter) provided the terms and conditions specified in the Letter of Credit have been met. Conditions which specified in Letters of Credit are typically evidenced by the presentation of specified documents. Since they are credit instruments, issuing banks rely on the creditworthiness of importers when issuing Letters of Credit.

The importer pays the issuing bank a fee to render this service. Letters of Credit are useful when there is insufficient credit information about a foreign buyer or the foreign buyer’s credit is unacceptable to the seller/exporter, but the exporter is comfortable with the creditworthiness of the issuing institution. Letters of Credit also serve to protect the importer since the documents required to trigger payment provide evidence that goods have been shipped as agreed. However, documentary discrepancies in Export Letters of Credit could potentially negate payment to the exporter, documents must be prepared by trained professionals.

Tips for Exporters For Letters of Credit

  • Exporters should consult with their bank before the importer applies for a Letter of Credit
  • Exporters must consider whether a confirmed Letter of Credit is necessary
  • Importers and exporters should negotiate and agree upon detailed terms and conditions to be incorporated into the Letter of Credit
  • Exporters must determine if all of the terms of the Letter of Credit can be met within the prescribed time limits
  • Exporters must ensure that all documents are consistent with the requirements of the Letter of Credit
  • Exporters must be very cautious in watching for discrepancies that may delay or prevent payment

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