How SBLC works

Now let's look at a Letter of Credit. 

For simplicity sake lets imagine that your company imports rice from a Vietnam manufacturer called Hanoi Manufacturing, which banks at First Hanoi Bank. Your company currently banks at First American Bank

For the purpose of this example these will be the roles that the parties will play in the letter of credit transaction:

Your company : applicant 

Hanoi Manufacturing : beneficiary 

First American Bank : Issuing Bank 

First Hanoi Bank : Advising Bank

The example: You want to buy $50,000 worth of rice from Hanoi Manufacturing, which agrees to sell the merchandise and gives you 60 days to pay it with the condition that you provide them with a 90 days letter of credit for the full amount. The steps to get the LC would be as follows:

1)You go to First American Bank and request a $50,000 letter of credit with Hanoi Manufacturing as a beneficiary.

2)The bank goes through its underwriting process. Although the bank is not advancing money, they are extending credit on your behalf and are taking on a contingent liability. If your company qualifies from a credit standpoint the LC is issued.

3)Even if your company does not qualify for credit, you can still get an LC if you are willing to put cash collateral CD secured letters of credit are very common for small business .

4)The bank sends a copy of the letter of credit to First Hanoi Bank, which lets the vendor knows and the merchandise is shipped.

Take into consideration that the letter of credit itself might be the source of repayment of the transaction. It could be that Hanoi Manufacturing is interested in getting paid as soon as the merchandise is shipped. Therefore, the letter of credit will indicate that payment shall be made as soon as Hanoi Manufacturing can present proof of shipping.

If the letter of credit that your vendor requires is not tied to a particular transactions, but they are asking for a guarantee that makes sure that you will not default. They are probably asking for a Stand-By letter of credit or a Revolving letter of credit. These types of LCs are usually for a longer term. Usually a year and are the vendor's guarantee that they will get paid.

The example above describes the simplest of letter of credit transactions. Although there are other factors involved such as the role of correspondent banks and confirmations, the thing that you should be concerned as a customer is expediency and the fees involved, which can run anywhere from 6% to 10% of the value of the LC

TYPES OF LETTERS OF CREDIT

1) Revocable letter of credit

Just like the name says the LC can be revoked by the Issuing Bank without the agreement of the beneficiary.

2) Irrevocable letter of credit

Can not be cancelled or amended without all the parties agreement.

3) Standby letter of credit

Guarantee of payment. If the beneficiary does not get paid from its customer it can then demand payment from the Bank by forwarding the copy of the invoice that was not paid and supporting documentation.

4) Revolving letter of credit

It is established when there are regular shipments of the same commodity between supplier and customer. Eliminates the need to issue an LC for each individual transaction.

Genuine Direct Clients may write us with their Client Information Sheets 

ghauritraders@gmail.com