Exporting risk

We recently started offering members a Letter of Credit service (both full preparation of all documents and presentation to the bank to examination of your documents to the bank).

Many of our members who trade internationally aren’t always aware of a Letter of Credit, defined as ‘a letter issued by a bank to another bank (especially one in a different country) to serve as a guarantee for payments made to a specified person under specified conditions.’

As long as these specified conditions have been met, in the event that the buyer is unable to make payment on the purchase, the bank will cover the outstanding amount.

The advantage for members of the Chamber who are selling products overseas is that they’ll obtain reassurance that their money will be sent in full and on time. A Letter of Credit is one of the most secure methods of payment for exporters, as the risk is transferred from the seller to the bank (or banks).

For those members who are purchasing products from overseas, using a Letter of Credit provides a guarantee that the seller will honour their side of the deal and there’s documentary proof of this.

Your bank will charge you for issuing a Letter of Credit so you’ll need to weigh up the costs against the security benefits.

Information is provided at www.gov.uk on when to use a Letter of Credit as follows:

Although letters of credit can be useful, it’s often best to avoid using one for a transaction. They can sometimes result in expensive delays, bureaucracy and unexpected costs. As a general rule you should probably only consider opening a Letter of Credit as an importer if:

  • Your supplier insists on it
  • National exchange controls require it

Think carefully about whether or not you need to ask an overseas customer for a Letter of Credit. Some important things to consider include:

  • Legal matters - does the country you’re exporting to require one?
  • Costs - does the value of the order justify the bank charges and extra costs involved, and who pays these costs?
  • The customer’s creditworthiness - do they have a track record with you?
  • Risks associated with the country you’re exporting to - is it politically stable with a good reputation as an international trading partner?
  • Normal trading practices - is it standard practice for exporters to use letters of credit when trading with that country, and/or in that particular commodity?
  • Available advice and guidance - banks may recommend using of a Letter of Credit in certain trading situations regardless of other factors, while credit insurers sometimes insist on it.

For more information, contact our export documentation team on 01224 343908.